Carnegie Steel: Building a Modern America
Revolutionizing steel-making through vertical integration, constant innovation, and scale to fuel American industrialization
As the U.S. entered a period of economic expansion following the Civil War, mass-produced steel became increasingly in demand. Railroads expanded westward, urban populations grew–necessitating the introduction of skyscrapers and thus more structurally resilient materials–and legacy infrastructure needed replacement.
From Andrew Carnegie’s founding of Carnegie Steel in 1875 until its sale to U.S. Steel in 1902, the company became the dominant steel supplier in the U.S. through a vertically-integrated manufacturing process that consistently incorporated the latest technological innovation.
Steel is a commodity product, so successful business is built on low-cost production. Carnegie executed on its business model in two main ways. The first was owning raw material supply. The steel-making process requires three ingredients: iron ore, coal, and lime; and both iron ore and coal had to be refined before use in steel-making. Second, Carnegie was able to generate unparalleled scale via productivity gains and capacity expansion, creating pricing power and leverage with customers.
Operationally, the location of Carnegie’s primary mills in Pittsburgh was very strategic for this first objective, as they were within close proximity of large anthracite coal deposits. The company controlled these nearby coal mines and benefited from reduced transportation costs.
Following procurement, coal had to be converted into coke, which consisted of removing sulfur and phosphorous though baking. Several nearby suppliers had blast furnaces producing coke for local steel mills. However, when they were unable to consistently meet demand for Carnegie’s mills, the company moved to construct its own blast furnaces for on-site coke production, cutting out these intermediaries and ensuring reliable and cheap supply.
The Pittsburgh region is also rich in natural gas–a critical fuel used to heat Carnegie’s furnaces–and which the company likewise controlled through direct ownership of wells.
Finally, Carnegie’s presence on the Pittsburgh’s Monongahela River [pictured below] provided an operational and strategic advantage in shipping finished steel to customers. At the mouth of the Ohio River (the Mississippi’s main tributary), this location provided convenient access to the burgeoning American West. Moreover, it was served by two railroads and a network of barges, so Carnegie was not beholden to any one logistics provider.
Nonetheless, advantageous geography and vertical integration can be replicated and are not alone sufficient for competitive differentiation. As such, Carnegie saw the importance of technological innovation, and was a driving force in pioneering advances within the industry.
The Bessemer process was patented by an English engineer in 1856 as an inexpensive method for mass producing steel, using oxidation to remove impurities from molten iron. Despite its advantages, the process was not widely adopted in America until Carnegie hired Andrew Holley, its first major U.S. proponent, to design his first plant [Edgar Thomson Works, above].
Ultimately, the Bessemer Process was displaced by the Open Hearth Process, with the potential to triple capacity of an average mill and the ability to produce steel from less pure iron and scrap metal. Carnegie installed the first Open Hearth furnace at the Homestead Mill [above]. By 1902, Homestead produced 1.5 million tons annually—25% of total U.S. open hearth production, despite 77 other such mills.
Amid the Vanderbilts, Rockefellers, and Morgans of his day, Andrew Carnegie understood he could not rely on being the premier capitalist, and embraced technology as the key driver of operational and financial success. He continually reinvested profits into the mills and frequently ordered even modestly outdated equipment torn out and replaced.
At Carnegie Steel, this formalized continual improvement process was known as “hard driving”, and sought to “increase blast furnace production through…the use of more powerful blast engines, hotter blasts, larger blast furnaces, the introduction of automatic raw materials storage, handling, and delivery facilities, and the production of clean blast furnace gas (4).” Ultimately, this capitalization strategy allowed him to both reduce labor costs and rely on less skilled, and thus inexpensive, labor.
The alignment of these operational processes toward consistent productivity improvement allowed the company to grow into the dominant steel provider of the time, increasing output while driving down the price of steel.
Carnegie became the world’s wealthiest man when he sold Carnegie steel for $480 million in 1902. In such an era, it’s easy to fixate on iconic individuals; however, Carnegie understood credit lay with the process, when he affirmed:
“Take away all our money, our great works, ore-mines, and coke-ovens, but leave our organization, and in four years I shall have re-established myself (3).”
Sources:
1. “Andrew Carnegie: Rags to Riches Timeline,” accessed December 7th, 2015, http://www.pbs.org/wgbh/amex/carnegie/timeline/timeline2.html
2. David P. Billington, The Innovators: The Engineering Pioneers Who Made America Modern (New York: John Wiley & Sons, 1996)
3. James Howard Bridge, The History of the Carnegie Steel Company (New York: The Aldine Book Co., 1903)
4. Joel Sabadasz, “The Development of Modern Blast Furnace Practice: The Monongahela Valley Furnaces of the Carnegie Steel Company,” The Journal of Society for Industrial Archaeology 18 (1992)
5. Thomas J. Misa, A Nation of Steel: The Making of Modern America (Baltimore: Johns Hopkins University Press, 1995)
Fascinating article, either from an operations or an economic history perspective! Interesting that nowadays the business model of steel production has completely changed: (i) the proximity of coal and iron is not necessarily the determinating factor of steel mill locations, and other inputs have become more important (especially labour costs); and (ii) I would think it rare to find a vertically integrated steel operation these days. Finally, just from an economic history perspective, this is a classic “Second Industrial Revolution” example of success and why the US and Germany were able to match and in many ways surpass the UK in late 19th century. In the UK, industrialising first meant by this period they had relatively subscale production and relied on increasingly outdated methods due to path dependency (i.e. you will keep using technologies even once they become outdated because the incremental cost to continue is less than the huge cost to change and gain some big improvement). Not only was Carnegie able to adopt the best technology at the time, as you mention “he continually reinvested profits into the mills and frequently ordered even modestly outdated equipment torn out and replaced”.