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Case Study Nucor...

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1 NUCOR CASE STUDY Table of Contents Executive Summary.........................................................................................................................5 Company Background.....................................................................................................................6 Problem Statement...........................................................................................................................6 External Analysis.............................................................................................................................6 Competitive Forces Impacting U.S. Steel Producers...................................................................6 Porter’s Competitive Forces........................................................................................................7 Threat of new Steel Industry Entrants.....................................................................................7 Threat of Steel Products’ Substitute.........................................................................................7 Rivalry among Competing Producers of Steel........................................................................8 Buyers’ Bargaining Power.......................................................................................................8 Suppliers’ Bargaining Power...................................................................................................8 Driving Forces.............................................................................................................................8 Future Profitability Prospects......................................................................................................9 Strategies that Nucor has Followed.............................................................................................9 Policies and Operating Practices Employed by Nucor..............................................................10 Factors that Account for the Success Nucor..............................................................................11 Situational Analysis for Nucor.......................................................................................................11 Strengths....................................................................................................................................11 Weaknesses................................................................................................................................12

2 NUCOR CASE STUDY Opportunities.............................................................................................................................12 Threats.......................................................................................................................................12 Internal Analysis............................................................................................................................13 The Financial Performance for Nucor.......................................................................................13 Factors that the Management of Nucor Needs to Address............................................................13 Alternatives....................................................................................................................................14 Alternative #1............................................................................................................................14 Alternative #2............................................................................................................................15 Alternative #3............................................................................................................................15 Recommendations..........................................................................................................................16 Action Plan....................................................................................................................................17 Immediately...............................................................................................................................17 0 to 3 Months.............................................................................................................................17 3 Months to 6 Months................................................................................................................17 6 Months to 1 Year.....................................................................................................................17 Long Term..................................................................................................................................17 Contingency...................................................................................................................................18 Appendix A: Detailed SWOT Analysis.........................................................................................19 Strengths....................................................................................................................................19 Weaknesses................................................................................................................................19

3 NUCOR CASE STUDY Opportunities.............................................................................................................................20 Threats.......................................................................................................................................20

4 NUCOR CASE STUDY Executive Summary Nucor is among the main manufacturers of steel within the United States. It is the largest scrap steel recycler in the world (recycling about 17 million tons of steel per annum). The company is also known for employing the use of energy efficient EAF (Electric Arc Furnaces) as well as mini-mills in the production of both cold and hot rolled steel. The company also supplements the requirements of raw materials with the use of scrap and steel substitutes of scrap. As an extremely diversified producer of steel in North America, Nucor has a management and infrastructure that can help in capturing positive trends in the market. This case study mainly seeks to analyze the challenges faced by Nucor in the Steel Industry and broad economic and social climate changes in the industry. The company’s financial analysis depicts that Nucor had a superb performance between the years 2000 to 2006 due to the development of right strategies and the execution of the strategies in a correct way. The three strategic alternatives for consideration were.  Alternative #3: Domestic Expansion within more states in the U.S.  Alternative #2: International Expansion (Such as Forming Joint Ventures with International Steel Companies)  Alternative #1: Investment in Technology with regards to the different iron isotopes so as to come up with better quality steel.

5 NUCOR CASE STUDY Company Background Nucor was founded in the year 1904 as a manufacturer of the motor car by Ransom Eli Olds by the name “REO”. The company then changed to a being a consulting firm for nuclear. In the year 1968, the nuclear corporation company bought an electric arc furnace and decided to venture into steel making and thus changed to Nucor Corporation as its name. The company then expanded its business to manufacturing steel products and recycling metals.

Problem Stat ement The main problem facing Nucor Corporation in the industry is a high amount of steel products in the U.S. market. Large quantities of steel from foreign companies are being sold in the U.S. market and thus the market contains a large volume of surplus steel, and the supply is in excess of the demand. Another problem facing Nucor is that they lack technological innovation. For the company to continue upholding good trends in profits it should identify the areas in which it has to improve in terms of technology so that it can be able to lower the costs of production and improve its output.

External Analysis Competitive Forces Impacting U.S. Steel Producers One of the main competitive forces that affect the producers of steel in the U.S. is a greater capacity for production from countries from abroad. The steel produced from competitors is almost of identical quality, and thus producers are forced to be competitive in price with regards to the steel parts’ demand and supply trends. Steel products’ prices are also influenced by

6 NUCOR CASE STUDY foreign currencies with regards to their strengths in comparison with the U.S. dollar. Stronger currencies allow foreign steel producers to produce their steel products at costs that are below those of the U.S. The competitive forces that are impacting Nucor can be analyzed by the Porter’s Five Forces as presented below. Porter’s Competitive Forces . Threat of steel products' substitute (Low)

Bargaining Power ofthe steel industry suppliers: (Moderate)

Rivalry among competing producers of steel (High)

Bargaining power of steel buyers (Moderate)

Threat of new steel industry entrants: (Moderate)

Threat of new Steel Industry Entrants The threat of new steel industry entrants is moderate. This is because the steel industry requires substantial capital for a business to start up. Due to low product differentiation there is a low cost of switching for steel buyers. Government regulations and rules also hinder many entrants to the industry.

7 NUCOR CASE STUDY Threat of Steel Products’ Substitute The threat of steel products substitutes is low. The only alternatives include plastics, stone, aluminum bricks, and fiberglass, but they lack durability and strength especially bricks and plastics. The costs of switching to these substitutes are also very high. Rivalry among Competing Producers of Steel The competition among producers of steel that are competing is high. The main reason for this is due to the lack of products differentiation in addition to low costs of switching for buyers. Buyers’ Bargaining Power Buyers’ bargaining power is moderate. The moderate bargaining power is due to the broad range of buyers, low product differentiation, as well as low switching costs. The bargaining power of the buyer is also decreased since steel is a commodity that is widely used. Suppliers’ Bargaining Power Suppliers bargaining power is moderate. The bargaining power of suppliers is relatively strong when US producers import raw materials. It is thus moderate because there are new ways of creating cheaper materials by the US steel producers themselves. The contracts of suppliers are also made on the long-term basis and thus reducing their bargaining power. The analysis of the Porter’s Five show that the general effect of the forces in the model is moderate; (High = 3 x 1 = 3; Moderate = 2 x 3 = 6; Low = 1 x 1 = 1; Total = 3 + 6 + 1 = 10; 10 ÷ 5 = 2, with High = 3, Moderate = 2 and Low = 1

8 NUCOR CASE STUDY Driving Forces One of the industries’ driving forces is the innovation of technologies in making steel such as the technology of thin-slab casting, electric arc furnace as well as direct carbon steel casting. This driving force has made companies such as Nucor to dominated segments that were dominated by integrated mills that used traditional technology. These new steel-making technologies are of low cost offering a high competitive advantage to Nucor against other companies that utilize traditional technology. Worldwide, the capacity of making steel exceeds its demand. This increases the anxiety of steel producers to run their companies with an intention of getting foreign markets. This is another driving force in the operation of this industry. Several steel suppliers from foreign countries are thus exporting some steel products to the U.S. putting the competition with Nucor and other steel producers at a high level. Future Profitability Prospects Nucor, as a low-cost producer is likely to gain a greater share of the steel industry market as compared to other companies that produce steel products at high costs as low costs offer a competitive advantage. Nucor should, therefore, consider expanding in this industry. Nucor has also been aggressive, to some extent, in expanding, as it has demonstrated proficiency in operating its plants profitably and efficiently. Strategies that Nucor has Followed The strategy that Nucor has followed is pursuing a leadership strategy in low costs. This is the best competitive approach as a strategy to improve sales for a product in a market. Nucor has achieved relatively low costs of production. Its plants have been inexpensively and are often

9 NUCOR CASE STUDY operated in an efficient manner. The company’s profitability records, even through hard economic times within the U.S. steel industry, provides a proof that Nucor’s costs are low as compared to other domestic producers of steel and most likely it is competitive in terms of cost with other foreign producers of steel selling their steel parts in the country. In addition to the above point, the cost competitive strategy of Nucor has been longstanding and no competitors within the U.S. that seem to have had costs that are lower as those of Nucor for many years. Therefore, it is clear that the low-cost advantage of over other steel producers within the U.S. has been sustainable and this appears to be holding it against foreign steel producers that sell products of steel to consumers within the U.S. Policies and Operating Practices Employed by Nucor Some of the main approaches, policies and operating practices that Nucor has put in practice for the implementation and execution of its chosen strategy include:  The culture of low costs for the company as well as its operating practices that are costconscious  The implementation and use of improved technological advancements save on costs.  Nucor has an incentive system of compensation for its employees at the plants as well as senior managers. This compensation scheme for Nucor is very efficient in generating gains through labor productivity that is continuous by motivating its employees in seeking out and implementing ways of operation that are cost-saving.  Nucor’s pursuit of technologies that are innovative to facilitate low production costs, as well as its profitable entrance into new segments of the market.

10 NUCOR CASE STUDY  Other human resources policies and practices for Nucor, for instance, its policy of no layoff as well as its empowerment system of employees at the plants helps to put into practice improvements in efficiency. Factors that Account for the Success Nucor The practice of a leadership strategy in low costs is an important factor as to why Nucor has been very successful over the years. This has been the most important strategy for the company as a winning strategy. As seen above, all of the procedures, policies, and operating practices for the company have made Nucor choose an excellent competitive strategy in addition to making it implement and execute the strategy with significant expertise. The company has also had an enormous strategic management, in particular with the case of Dan DiMicco and Ken Iverson. There is no doubt that the smart senior managerial team of Nucor has also been one of the major reasons for the company's success over an extended period of time. Situational Analysis for Nucor Strengths

 The technological proficiency of Nucor as well as its innovative potentials in making steel is one of its strengths.  Nucor has a very strong management at the top.  Nucor has also proven expertise and skills in maintaining costs low (by the use of an excellent exercise of incentives, a corporate culture that is cost-conscious and by the utilization of the lean corporate management.  A labor force that is productive, well-compensated and motivated.

11 NUCOR CASE STUDY  A wide range of products of steel being produced.  The company has also had the ability to have a vast share of the market Weaknesses

and gain sales due to it low-cost strategy.  Nucor’s mini-mills economics dependent highly on the favorable prices of scrap steel and also on sufficient scrap steel supplies.  In the recent times, steel products have had prices that have been depressed, and this has deeply cut into the profit margins of Nucor.  There was a limited dependence on the company on having a strategic plan and vision in the years that past and the company’s primary

Opportunities

objective was to build additional plants.  There is an excellent opportunity for the expansion of the company into other categories of products.  Growth of the share of sales and market for the company with regards

Threats

to its rate of expansion and low cost is a great opportunity  There are a growing number of foreign steel producers who opt to sell their products at low costs.  Any rise in the prices of scrap steel has the potential of cutting deep into the profit margins of Nucor.  Insufficient raw materials  Environmental concerns that are rising  Energy crisis  Rivals in the industry such as Mittal Steel are cutting down the costs of steel thus acquiring assets for making steel that are cost-efficient hence improving their competitiveness.

12 NUCOR CASE STUDY Internal Analysis The Financial Performance for Nucor The expense ratios for Nucor are presented below

Cost of Sold Products as a Percentage of the net Sales The Percentage of Administrative, Marketing and other Expenses to Net Sales

2000 2001 2002 2003 2004 2005 2006 82.61% 90.32% 90.02% 95.70% 80.24% 79.41% 76.48%

3.85%

3.48%

3.66%

2.64%

3.65%

3.89%

4.02%

The net sales for Nucor grew from 4.76 billion dollars in the year 2000 to 14.75 billion dollars in 2006, which represents a Compound Annual Growth Rate (CAGR) which is very heavy (20.7 percent). This is due to the rising volume of unit sales as well as the rising prices of steel per ton (as seen in the data in Exhibit 5 and Exhibit 1 in column 2 and column 3). Exhibit 2 shows that the company has been having a strong financial performance especially in the years 2004 to 2006. The net earnings of Nucor grew from 310.9 million dollars in the year 2000 to 1.76 billion dollars in the year 2006, representing a 33.4 percent CAGR. The company’s net earnings for each common stock share moved from 0.95 dollars in the year 2000 to 5.68 dollars in 2006, representing a 34.7 percent, which is strong.

Factors that the Management of Nucor Needs to Address

13 NUCOR CASE STUDY  The Nucor management needs to establish the best ways to deal with the threats posed by the business and establish the best ways to go with the competition.  The Nucor management also needs to establish if they can continue expanding the steelmaking capacity for the company as well as the balance that is required between building new plants and making extra acquisitions.  The company also needs to establish whether it should continue focusing on the US market or expand to other markets abroad.

Alternatives Alternative #1: Investment in Technology with regards to the different iron isotopes so as to come up with better quality steel. Advantages  May increase the company’s productivity and consequently drive down the price.  Aids in the production of steel with better qualities  Nucor would create a competitive advantage over other steel producers  May lead to production with lesser human resources and capital thus reducing expenses  The company will be able to sell the patent to its partners and thus

Disadvantages  Investments in new Technology require very high costs  Desired results may not be achieved  The process could be slow  New Technology ca be tricky to apply in older mills

14 NUCOR CASE STUDY generate profit at a faster rate

Alternative #2: International Expansion (Such as Forming Joint Ventures with International Steel Companies...