To: Dan DiMicco From: McKensie Booth Subject: Strategic Management Date: 11/9/2010 Nucor Corporation Memo Response: Per your request I have analyzed Nucor Corporation and the steel industry. After performing both strategic and financial analysis I offer my recommendations. Executive Summary: Nucor Corporation was the most profitable steel producer in North America in both 2005 and 2006. It is regarded as a low-cost steel producer in the United States, and one of the most efficient and technologically innovative steel producers in the world.
Nucor is known for its aggressive pursuit of innovation and technical excellence, rigorous quality systems, strong emphasis on employee relations and workforce productivity, cost conscious corporate culture, and ability to achieve low costs per ton produced (C-194). Offering a streamlined organizational structure, Nucor uses its ability to achieve incentive-based compensation systems that rewards goal-orientated individuals for their performance.
Over the years Nucor has expanded progressively into the manufacturer of a wider and wider range of steel products, which has gotten it to be able to offer steel users one of the broadest product lineups in the industry. In this industry steel products are considered commodities, and most steel plants turn out products with comparable quality to other companies. This makes one producer’s reinforcing bar essentially the same as another producer’s reinforcing bar, which in turn makes a particular grade of sheet steel made at one plant almost identical to the same grade of sheet steel made from another plant (C-195).
Because of this, steel producers are forced to be price-competitive with the market price of each individual steel product being driven by demand-supply conditions for that product. After considering all of these aspects of Nucor, and the steel industry I will be discussing the strength of the competitive forces, the key success factors for this industry, and the pros and cons of Nucor’s competitive strategy. A SWOT analysis will further help me analyze the situation so then I can look at how attractive Nucor’s value chain is compared to the value chains of the other integrated steel mills.
I’ll conclude with strategic issues I believe that Nucor’s management needs to address, and recommend the actions I think will be necessary to enhance Nucor’s position and future performance to compete effectively against low-cost foreign steel imports into the U. S. Competitive Analysis: 5 Forces Model Intensity of Rivalry among Competitors: Fierce Global competition in the steel industry faces Nucor and the wide range of competitors that make up the industry. Just in the domestic market alone there are more than twenty competitors that range on a larger to smaller scale.
This intense competition amongst the competitors causes a recurring effect within the industry. Each competitor is trying to out bid the others for a contract, which allows for price wars among the market. This goes to prove that the industry is not based on differentiated products, but rather price competition. In the end, the company with the lowest fixed costs will survive and be the most profitable. Nucor’s use of both base pay and incentive pay makes it more guaranteed that output is relative to pay, which therefore decreases the fixed costs.
The use of different business models is also a good indicator of the competition. Nucor uses a decentralized structure with control at the local factory level. This allows for focused decision making, and a more efficient use of profits. Threat of new entrants: Weak The entry into any industry depends directly on the associated costs. Because of globalization growing at a rapid pace, the merging of many competitors to form larger companies have made the barriers to entry increase. Economies of scale and capital requirements seem to be the greatest barriers in the steel industry.
Larger quantity orders of raw materials are usually discounted. Higher production volumes directly discount the associated costs. Product differentiation is also a major barrier to entry. Steel is not sold on its overall difference, but more commonly on price. Many manufacturers utilize the same technologies and processes. Price wars are seen to minimize fixed costs, which mean there are few switching costs from one manufacturer to another. There is very little brand loyalty in this industry, especially when it does not appeal to consumer loyalty or brand image.
Entrants must find ways to compete based on lower costs. Access to raw materials can also be a barrier. A lot of the time materials must be bought in large quantities. There is no cost advantage associated with small material purchases, and that can directly increase the overall manufacturing costs. This can make competition challenging in a market where margins are already very small. Government policy is not a huge threat of entry on the domestic level, but at the international level the barriers become much larger.
Well established relationships by larger steel manufacturers with government allows for easy establishment of contracts in a foreign territory. Since most steel manufacturers must be globally competitive to maintain profits government policy is a threatening entry barrier. Bargaining Power of Suppliers: Strong The supply of raw materials can have a positive or negative effect on a cost strategy. Most of the steel used in domestic manufacturing in the United States is imported. On a larger scale there are relatively few suppliers who can meet the constant demands from a steel company.
Because of this it is really common for joint ventures to be established between suppliers and manufacturers. This can help decrease the costs of supplies. The biggest threat is when large suppliers try and enter the market through the elimination of a third party manufacturer. Bargaining Power of Buyers: Strong Buyers seem to be the greatest threat. Price competition arises from buyers have low switching costs and low product differentiation. Due to these factors, buyers have the power to negotiate the deal down as far as they want.
Many buyers purchase in large quantities which creates economies of scale. Ultimately, the goal for a buyer is to get the best product at the most efficient cost. The goal of a seller is to gain the most financial return for the least cost. Since the market is filled with many suppliers, and if you take into account the different goals of a buyer and a seller you would conclude that the steel industry is a buyers market. Threat of product substitutes: Weak There are few substitutes for the use of steel. The largest alternative to steel would be the use of another material.
Alternatives increase market presence at times of economic downturn and times of increase in steel material cost. The goal is to maintain low costs and market share during times of economic fluctuation. Plastics or Wood could be two substitutes, but neither have the same durability that steel has. Assessment: Although it may not seem like the steel industry is an attractive market due to its maturity, and even though that may be true on a small scale, I think advances in globalization for the steel industry has made it become very attractive for those that are willing to compete on a much larger scale.
Key Success Factors: • Ability to achieve scale economies (important to achieving low production costs) • High labor productivity/low-cost product design and engineering • Breadth of product line and product selection • National and global distribution capabilities • Overall low costs (not just in manufacturing) Assessment: It’s vital for companies in the steel industry to achieve economies of scale so that they can have low production costs. The steel itself needs to be low cost, and the labor must be productive to produce at an efficient level.
The breadth of your product line can put you above the other companies and help you stand out. The ability to compete at a global level is also very important when measuring success in this industry when it may be hard to differentiate your product from others. Nucor’s Competitive Strategy: Pros and Cons Starting in 2000, Nucor started on a four-part growth strategy that involved: new acquisitions, new plant construction, continued plant upgrades and cost reduction efforts, and joint ventures. Strategic Acquisitions: Pros: strengthen customer base, geographic coverage, and lineup of product offerings.
Cons: economic downturns did not make the market conditions favorable. New Plant Construction: Pros: continue to be a technology leader allowing it to be first-to-market with new steelmaking technologies, and the process of Castrip which is one of Nucor’s recent success stories. Cons: Castrip was hard to make ready for commercialization taking many years for testing and processing refinement. Low-Cost Production: Pros: capital investments to improve plant efficiencies and keep production costs low. Cons: I don’t see any cons with this strategy. Global Growth via Joint Ventures:
Pros: bigger growth globally that allowed it to counteract the global warming happening. Cons: does not currently have any plans to build and operate its own steel mills outside of the United States, other than its plant in Trinidad. Competitive Analysis: SWOT Strengths: • Strong market position • Increased production capacity • Strong technological focus • Positive Company Morale • Low Cost Production Weaknesses: • Geographical concentration • Mature industry Opportunities: • Joint ventures • Acquisitions Threats: • Repetitive nature of the industry Consolidation in the global steel industry • Increasing raw material costs Assessment: I believe that Nucor Corporation has many different competencies that allow it to a hold a strong position in the steel industry. Globalization is going to be a major threat and there will soon be a strong push towards technological integration and advances. The United States steel industry is very mature so Nucor will have to look internationally for profits and more growth. A joint venture will be a good opportunity for Nucor to consider so that it can accomplish this international growth.
Overall, I also think that price is everything in the steel industry, especially in a time of mass globalization. Value Chain Analysis: Primary Activities: Supply Chain Management: Nucor has established a raw materials strategy so that it can control directly and indirectly through joint ventures with various partners. This helps maintain minimum levels of raw materials in inventory, but also ensures that those raw materials are present in the supplier’s inventory, allowing for inventory costs to be associated with the supplier’s balance sheet as opposed to Nucor’s balance sheet.
Operations: Nucor has 49 facilities in 17 states, and was the largest recycler of scrap steel in North America. This involves less production steps, far less capital investment, and considerably less labor time. Nucor is decentralized with control at the factory level over operational decisions and processes. Because globalization and international growth are huge factors for success, this strategy should be replaced by a corporate centered approach. Distribution: On time delivery is crucial for both Nucor and the steel industry.
In 2005-06, freight costs for deliveries were less than 10% of revenues, and by Nucor developing its plant sites with the expectation of having several customer companies located nearby saved them shipping costs as well. Sales and Marketing: Nucor’s status as a low-cost provider resulted in numerous customers’ entering 6-12 month contracts to purchase steel mill products. The steel industry doesn’t need to advertise, but by Nucor maintaining a good reputation it has been able to attract customers who provide the company with loyalty.
Service: Quality is built into service in the steel industry. Quality control is very important to maintain the durability and exact specifications of the manufactured product. Nucor has employees both internally and externally to manage their quality control which will keep their service high, and customer’s loyalty. Support Activities: Product R&D, Technology, and Systems Development: Nucor is known for developing new product technologies. They have had many advances in the steel manufacturing process, and increasing efficiency of production.
A strong technological orientation enables the company to reduce its operating costs to compete effectively in this market. Human Resources Management: Management is obligated to manage Nucor in such a way that employees will have opportunity to earn according to their productivity. Employees should be able to feel confident that if they do their jobs properly, they will still have their job tomorrow. Nucor stands for their employees to be treated fairly, and gives their employees opportunities to appeal if they do not feel as though they are not being treated the way they should.
General Administration: Nucor has a simple, streamlined organizational structure to allow employees to innovate and make quick decisions. There are group managers, department managers, supervisors, and the hourly employees. Group managers and plant managers report to one of the four executive vice presidents at corporate headquarters. The staff is pretty small with only 66 people in 2006, but the philosophy is that the corporate headquarters should consist of a small group of executives who will guide the decentralized operation where liberal authority was the managers in the field responsibility.
Assessment: I believe that Nucor’s value chain is very attractive in comparison to its competitors in the steel industry. Nucor’s value chain involves fewer production steps, and less capital investment, with considerably less labor than the value chains of companies with integrated steel mills with give it a competitive advantage. Internally the way Nucor operates is attractive for employees knowing that they will get treated fairly, and paid appropriately. Strategic Issues/Recommendations: Areas of Concern: • Lack of Global Growth • Joint Ventures/Acquisitions hindering company culture Unfavorable conditions in International Growth • Lack of corporate involvement Recommendations: Steel manufacturing is an old business, but is currently facing changes associated with new technologies and the rise of globalization. I recommend that Nucor takes part in this new trend of global growth in the near future. Part of its strategic plan was to do this via joint ventures, but does not have any plans so far to build and operate its own steel mills outside of the United States. I think it would be very crucial for Nucor to do this so that it can compete at a higher level than its competitors.
Nucor is doing a good job of keeping up with the latest technologies, and being first-to-market with some of its own technological advances that will help the company keep its competitive advantage and remain one of the most profitable steel producers in North America. Another recommendation I’d like to make is for Nucor to incorporate more involvement from its corporate headquarters. If Nucor does start taking actions to have a more global presence, then it will need to make sure that all of its operations stay on the same page, therefore needing a bigger corporate presence.