Nucor Case Analysis
In general, U. S steel producers composed of integrated steelmakers and mini-mill companies are situated in the midst of an increasingly competitive environment in both the domestic and global scale which adversely affects their profitability. This competition is characterized by a fierce competition among steelmakers to capture a significant portion of the steel market in light of the fact that the global supply of steIt is clear that U. S. steelmakers are primarily affected by the abundant steel supply versus demand, which depresses the market price of steel as a commodity.
(Ibid) Consequently, there is a fierce competition among steelmakers to lower product prices in order to capture a significant portion of the market. Second, Nucor and other U. S. -based steel producers are adversely impacted by the entry of foreign players into the domestic steel market that are able to take advantage of lower labor costs in the countries where they operate and are therefore able to significantly reduce their product prices.
The influx of cheap imports from foreign steelmakers therefore stiffens the existing price competition among rival steel producers for lowering their own production costs as the drastically lower prices of steel imports has the ability to drag down steel market prices. Third and lastly, U. S. steel producers are more vulnerable than ever to increasing cost of raw materials. This is especially true for integrated steel producers who need vast quantities of ore and energy for their operation.
The rising costs of raw materials also increases the production costs incurred by integrated steel producers which makes it difficult for them to be price competitive. Meanwhile, there is very little competitive pressure coming from other industries offering steel substitute although Gordin (2007) notes that there is an “emerging trend that the automotive industry (historically the largest consumer of steel) was using lighter plastic parts for cars. ” (p. 31) Minimills are subject to the same intense pressure to be price-competitive and cost-effective in order to estalish market presence.
The difficulty in product differentiation in the steel commodity market makes it necessary for minimills to be able to compete with their rivals based on price. In terms of pricing and market niche, the biggest competitor that Nucor and other minimills face in both the U. S. domestic market and the global market are foreign steelmakers who are able to sell the same product specifications and quality as that of minimills on a much lower price. (Thompson, 2007, p. C119) In terms of production capacity, minimills are undoubtedly pitted against integrated steelmakers.
Unlike integrated steelmakers such as Mittal Steel, however, minimills do not require large capital investments for production and require lower labor costs (Crandall, 1996, p. 107) and are therefore more cost-effective, which enable them to price their products on a par level with foreign imports. Their competitive pricing strategy enables minimills to enter into profitable contracts with buyers and ensures that they have less inventory at hand. On the other hand, minimills are also exposed to the steep prices of raw materials.
The increasing demand for scrap steel vis-a-vis a limited supply gives scrap steel suppliers the power to increase prices. While minimills have undoubtedly reduced the power of traditional steel industry suppliers due to their lessened dependency on ore, fuel, and electricity, (Gordin, 2007, p. 30) they are nevertheless vulnerable to supply limitations and fluctuations in scrap steel prices that affect their profit margins and price competitiveness. 2. What driving forces do you see at work in this industry?
Are they likely to impact the industry’s competitive structure favorably or unfavorably? The driving forces in the steel industry are the fluctuations in the global demand for steel; the continued development of technological innovations that dramatically cut production costs and capital investment for steel producers; the fierce competition among steel producers; and the increasing consolidation among steel companies. The commodity nature of steel makes it subject to demand-supply mechanics, (Thompson, 2007, p.
C115, C128) which affects steel producers both favorably and unfavorably. Phelps (2006) observes that there has been an increasing demand for steel over the past few years, which has resulted in an increase in steel prices, but warns against the “changeable and unpredictable” nature of the steel market and its vulnerability to domestic and global economic downturns. As in most commodity markets, increase in demand invariably leads to a robust competition among steel producers to increase their margins through different strategies.
In contrast to other commoditized goods, steel products cannot be significantly differentiated through quality or branding. Hence, steel producers are driven to resort to building their competitive structure either through competitive pricing or maximizing their productive capacity. A consequence of the stiff competition among steel producers is the need for constantly innovating and adopting advanced technologies for modernizing their production facilities in order to be more productive and cost-effective.
The competition posed by cheap steel imports, for instance, forces many steel companies not only to modernize their facilities in pursuing cost-effectivity but to explore labor management structures that were more efficient and less costly than traditional management styles. Baily, et. al. (1995) argue that “vigorous global competition against the best-practice companies not only spurs allocative efficiency, it can also force structural change in industries and encourage the adoption of more efficient product and process designs.
” (308) However, increased productivity can also lead to a surge in supply, which affects steel prices and also increases the competition among the players in the steel industry. Likewise, steel companies which are unable to take advantage of new technology and maximize their capital investments inevitably perish or lose their market base to more innovative and cost-effective companies, as in the case of integrated steel giants which were adversely affected by the entry of minimills and foreign players into the U. S. steel market.
Another consequence of the stiff competition between steelmakers is the increasing consolidation in the steel industry as steel companies’ bid for increased market “increased market power through supply concentration, and rationalization of obsolete/low-return operations. ” (Jardini, 2000, p. 3) Consolidation between steel players has enabled some struggling steel producers, especially integrated steel companies, to resolve insolvency issues and to gain access to capital that have since been denied by lenders and banks due to the dismal performance of majority of U. S. steel industry players in the past.
(Ibid) It is therefore not surprising that most of the mergers involved a U. S. company being acquired by a foreign steel company, as in the case of European company Mittal Steel’s acquisition of U. S. steel producer International Steel Group. (Thompson, 2007, p. 134) A notable exception is Nocur’s strategic acquisition of other minimills in order to expand its product line and to boost its productive capacity. The increased consolidation of the steel industry therefore means that there is less but more powerful companies wrestling for greater market share and control, (Thompson, 2007, p.
C134) which makes competition more fierce and productivity at an all time high. 3. How attractive are the prospects for future profitability of U. S. steelmakers? Should Nucor consider expanding in this type of industry environment? Why or why not? The future profitability of U. S. steelmakers appears to be dim in terms of the domestic market, given that the demand for steel in the U. S. has been on a downtrend since 2000. (Thompson, 2007, p. C130) However, “there is ample room for increases in per capita steel consumption that will continue to drive steel growth, especially in developing countries, over the next few decades.
” (Jardini, 2000, p. 3) To maintain their profitability, U. S. steel producers should either be able to expand in the domestic market by increasing market share or start looking outwards for their expansion into untapped or developing steel markets. The future profitability of U. S. steelmakers is challenged primarily by the emergence of rival foreign companies that have been gaining an increasing share of the demand for steel in the United States. Another challenge is the looming oil crisis that is bound to affect the ability of the U. S. steel industry to compete based on cost-effectivity.
Likewise, Jardini (2000) notes that “the U. S. integrated steel industry currently faces a crisis potentially as significant as that of the early 1980s” (p. 1) due to capital shortages, which would have significant impact on the ability of the integrated steel producers to compete with low cost imports and more cost-effective minimills. Higher levels of productivity arising from the rapid modernization and technological innovation of powerful players in the steel industry could also backfire as it could swamp the domestic market with steel products and inevitably result to lowered steel prices.
Despite the grim over-all projection for the U. S. steel industry, minimill groups like Nucor are bound to be more profitable. The problems faced by integrated steel producers in terms of capitalization and complex value chain creates a favorable situation for companies like Nocur to leverage its low-priced but high quality products to wrestle away the markets that have been traditionally controlled by integrated steel producers. Nocur would also be less impacted by oil shortages than integrated steel producers which are more fuel-dependent.
Likewise, Nocur can easily develop and penetrate foreign markets given the minimal investments needed for the construction, development, and operation of minimills compared to the restrictive costs of expanding integrated steel operations. Nocur’s minimill technology also has the best chance of competing against more modern foreign steelmakers in terms of price competitiveness and productivity. 4. What type of strategy has Nucor followed?
Which of the five generic strategies discussed in Chapter 5 is Nucor employing? Is there any reason to believe that Nucor has achieved a sustainable competitive advantage over many of its steel industry rivals? If so, what type of competitive advantage does Nucor enjoy? The type of strategy that Nucor has followed is that of the overall low-cost provider. This is evident in how Nocur “gradually increased its appropriated value by keeping an extremely low cost structure throughout its expansion. ” (Gordin, 2007, p.
29) In essence, Nocur’s strategy involved developing cost-effectivity in every aspect of its operation in order to be able to match the lowest priced products or even price its products on much lower levels than its competitors, which enabled Nocur to maximize its earning potential by appealing to more customers. The appeal of low cost products and timely delivery also enables Nucor to have a captive market through contracts with buyers that reduces the pressure coming from fluctuations in steel demand.
Clearly, Nucor currently enjoys a sustainable competitive advantage over many of its steel industry rivals by being a low-cost provider. Its low-cost provider strategy fit well with the competitive environment of the steel market where product differentiation was almost impossible or unprofitable and where there was an excess of supply versus actual product demand. Its low pricing strategy also enables it to survive the intense competition caused by the entry of new, foreign players who offered steel at half the prevailing prices.
Aside from fitting its strategies with the nature of the steel market environment, the fit between Nocur’s internal processes also plays an important role since “the notion of consistency, or internal fit, among an organization’s elements has long been accepted by academics as a major contributor to long-term success and that which forms the very essence of sustained competitive advantage. ” (Gordin, 2007, p.
1) Nucor’s competitive advantage was driven by its focus on constant innovation and implementation of cost-efficient production strategies to minimize over-all production costs, from its plant operations to its pay-per-performance compensation system. Hence, Nucor emphasized an output-driven management and labor system which presented a sharp contrast to the management and labor relations of its rivals.
Smith (1995) contends, for instance, that “the integrated sector’s difficulties stem from an inability to respond effectively to product market competition, due in large part to rigid internal labour market structures and an historical legacy of labour/management conflict which impedes internal adjustment to external pressures. ” (p. 277) In contrast, Nucor employed an egalitarian structure and a fringe benefit program which made it unnecessary for workers to form unions to protect their interests, mirroring Poulin and Dadgostar’s (2007) assertion that the quality of management “is a potential source of competitive advantage” (p.
125) In the same manner, most of Nocur’s activities were done to complement its low-cost strategy. For instance, Nocur employed a backward integration strategy to control value-chain cost drivers such as raw material supply. (Thompson, 2007, p. C114) The company also employed forward integration strategy involving the transportation of its products to enhance customer service through reliable and just-in-time product delivery.
Its strategic acquisitions were geared at increasing horizontal integration to gain more geographical coverage and therefore expand the market of its products. (Thompson, 2007, p. C116) Nucor’s low-cost strategy is not without its pitfalls. For one, it needs to be able to keep production costs at minimal levels in order to be profitable, which makes it vulnerable to the rising prices of raw materials. The company also needs to employ stringent quality standards to ensure that its product quality do not deteriorate because of cost constraints.
Thus, the company needs to gain control over the entire aspects of the value chain in order to reduce dependence on outside suppliers and to minimize the risks of inferior raw materials for its steel production. 5. What does a SWOT analysis reveal about Nucor’s situation? Does Nucor have any core or distinctive competencies? A SWOT analysis of Nucor’s situation reveals that Nucor’s core competencies are in its low-cost strategy and over-all cost-efficiency, its unique management structure, and its focus on innovation and technology.
Nucor’s main source of strength lies in its ability to compete with the low-priced products of both its domestic and foreign rivals because of its low-cost strategy. This allows it to enjoy a significant market share in the U. S. domestic steel market and to withstand competition from cheap imports. Nucor’s low cost pricing strategy is complemented by a lean management structure and egalitarian company culture (Thompson, 2007, p. 126-127) that emphasizes teamwork and awards benefits based on company performance and productivity.
Tornell (1997) notes that the “competitive success of minimill steel producers can be explained in part by their ability to cultivate and sustain flexible and participative labour market and industrial relations systems. ” (p. 4) This observation is reflected in Nucor’s highly loyal, non-unionized workforce and a management that is eager to discover and implement innovations to foster productivity and profit for the company. (Thompson, 2007, p.
128) Nucor’s technology-driven and innovation-oriented nature also enables it to leverage knowledge to enhance its productive capacity and is also strategically aligned to controlling the cost drivers in its value chain, as exemplified in the company’s joint venture with a Brazilian company in an environmentally-friendly pig iron project which could provide the company with scrap steel substitutes and allow it to control raw material costs. On the other hand, Nocur’s main weakness was its dependence on scrap metal resources with “volatile” prices (Crandall, 1996, p.
111) and its limited foreign market presence. The company’s dependence on scrap metal exposed it to the increasing costs which could undermine the company’s cost-efficiency. Likewise, Nocur’s focus on the U. S. steel market exposed it to fierce competition from larger integrated steel producers and from foreign steel exporters which hindered it from fully capturing the steel market. Nucor ‘s main threats come from the presence of domestic and foreign rivals and the rising prices of raw materials.
The increasing consolidation of integrated steel producers makes them more powerful in terms of capital resources and production capacity, which poses a significant threat to Nucor’s ability to maintain and expand its market share. Likewise, Nucor’s low cost strategy is threatened by the rising costs of scrap metal and other raw materials for steel production, which could decrease the company’s ability to compete with the low prices of its domestic and foreign rivals in the industry.
Nocur’s opportunities include the expansion of its operation into foreign markets and the expanding its technology ventures to support the development of more efficient and cost-competitive industrial processes. Nucor could leverage its cost-efficiency and innovation-driven production in its entry into foreign markets, which could make increase the company’s profitability. The company’s technology ventures could also support the productive capacity demands of exporting its products to foreign markets. 6. What issues does Nucor management need to address?
What recommendations would you make to Dan DiMicco? Among the pressing issues that the Nucor management needs to address are the upward trend in production costs brought about by the rising costs raw materials such as fuel, electricity, and scrap metal; the saturation of the domestic U. S. steel market due to intense competition, cheap imports, and higher productivity growths among both integrated steel producers and minimills like Nucor; and the intense competition which results from market saturation and penetration.
In terms of rising production costs, Nucor can counter higher energy costs in two ways: first, by using Nucor’s existing partnerships to research and develop a technology that is less dependent on fuel and electricity to replace the company’s existing electric arc furnace technology in a manner that would not affect the productivity of Nucor’s plants, or second, by partnering with other businesses in initiatives to develop alternative fuel sources in order to cushion the impact of the impending oil crisis on Nucor’s profitability.
Likewise, Nucor needs to significantly reduce its dependence on scrap steel for its raw materials especially since increased steel demand also increases the price of scrap steel. Crandall (1996) notes that “as long as steel demand is growing rapidly, the supply of obsolete scrap is likely to be small relative to current demand for metallic inputs to steel furnaces,” (p. 111) which severely constrains Nocur’s ability to maximize its productive capacity during times of unusual high product demand and puts mini-mills at a relative disadvantage compared to integrated steel producers.
The saturation of the domestic market should be a major consideration in Nocur’s expansion decisions. Nocur’s profitability clearly depends on its ability to be globally competitive, which means being able to compete domestically and “also against the best external producer. ” (Baily, et. al. 1995, p. 336) Given the increasingly hostile competition in the domestic steel market, Nocur should consider looking for other markets where it could take advantage of its minimill technology and its economies of scale.
Works Cited: Crandall, Robert W. (1996). From competitiveness to competition: the threat of minimills to large national steel companies. Resources Policy, 22 (I/2):107-118. Baily, M. N. , Gersbach, H. , Scherer, F. M. , & F. R. Lichtenberg (1995). Efficiency in manufacturing and the need for global competition. Brookings Papers on Economic Activity. Microeconomics, (1995): 307-358. Gordin, Regina (2007). Nucor corporation: a study on evolution toward strategic fit. Unpublished Masteral Thesis, University of Pennsylvania.
Retrieved July 24, 2008 from http://repository. upenn. edu/od Jardini, D. (2000). International collaboration in the U. S. steel industry. In American Metal Market, Steel Success Strategies Conference Special Edition. Phelps, David (2000). The U. S. steel market. Retrieved July 25, 2008 from http://www. aiis. org/index. php? tg=articles&idx=Print&topics=20&article=197 Poulin, B. & B. Dadgostar (2007). Quality management: an index for actual practice and managers’ perception. Journal of Business Case Studies, 3(4): 125-136.
Smith, Suzanne Z. (1995). Internal cooperation and competitive success: the case of the US steel minimill sector. Cambridge Journal of Economics, 19: 277-304. Thompson, Arthur A. (2007). Nucor corporation: competing against low-cost steel imports. In Arthur Thompson (ed. ) Crafting and Executing Strategy: the Quest for Competitive Advantage: Concepts and Cases, (p. C114-C136). U. S. A. : Irwin/McGraw Hill. Tornell, A. (1997). Rational atrophy: the U. S. steel el far exceeds the demand for steel products. (Thompson, 2007, p. C115)Sample Essay of Custom-Writing