Nucor Corporation - Case Study Example

Assignment Ref Case Analysis – Nucor Corporation Introduction Nucor has been in the steel business since mid-1960s, after suffering some setback in its earlier non-steel business operations involving automobiles, nuclear instrumentation and electronic goods (Nucor, 2007). Since entering the steel business and reorienting its strategy, it has shown consistently good physical and financial performance, especially in the past few years even as it faces new challenges. Steel industry dynamics Steel industry has become extremely cost competitive during the same time as Nucor was growing in its operations. Traditional dominance in steel making by the US, Russian, European and Japanese plants had given way to low cost steel producers in countries like China, South Korea, India, Mexico and Brazil. Rising manpower and energy costs in the developed world were responsible for this shift. A number of US production plants that were based on traditional routes of steel making were forced to close down fully or partially, due to uneconomical cost of production. Plants started adopting the arc furnace / continuous casting route to produce smaller quantity of higher value added products. Losses or reduced profitability in the industry led to increased mergers and acquisitions (M&A). Significantly, this M&A activity is not confined to units within a country. Thus in today’s environment, steel products market is characterized by newer technologies with smaller plant capacities, consolidations with economies of scale of operations, value added products and global foot-print of corporations. (last name) 2 Nucor Corporation’s strategic response to industry dynamics Commencing with the acquisition of Vulcraft Corporation in South Carolina to produce steel joists and beams about five decades ago, Nucor entered the industry and emerged today as a major steel maker in the US (Nucor, 2007). This was followed by Nucor’s pioneering efforts in investing in arc furnace technology for steel making and later, in the development of thin strip casting. Success of these risky ventures ensured Nucor’s technological leadership and cost competitiveness. Nucor went on to build or acquire plants all over the US in order to service customers with supply of competitive products at their doorsteps. Value chain concept is very much evident in these efforts as can be seen in the Appendix 1. Assessment of Nucor’s strategy From being a small player, Nucor emerged as a major player in the industry with emphasis on flat products (sheets and strips), which are of higher value, even as it continued to produce diverse products for diverse customers and thus insulating itself from any unpleasant down trends in any sector. Thus bars, beams, plates and re-bars are in its portfolio, mainly catering to construction, heavy engineering, auto and housing sectors. Its acquisition of Harris Steel Group during 2007 has been part of its strategy to strengthen its profitable downstream product business. Issues for future Keeping up the momentum of profitable growth and warding off possible takeover bids are the issues for Nucor. Its primary strengths lie in innovation and risk taking ability, value addition to products and customer-centric operations. These need to be sustained for future as well. Appendix 1 (last name) 3 Competitive and driving forces in steel industry According to Porter, the five competitive forces in any industry are the power of buyers, the power of suppliers, threat of new entrants, substitute products, and the rivalry among existing competitors. In the case of steel industry, the power of buyers is strong in view of globalization and liberalization of world economies. Countries like China produce very large volumes of general-purpose steel, subsidize the operations and export the products at highly competitive prices. The power of sellers and of the threat of new entrants is moderately strong, particularly in the sphere of high value and higher quality end products. The threat of substitute products is weak in spite of the emergence of plastics for certain applications. Finally, the rivalry among existing competitors is strong with the factors of bulk supplies competing with smaller capacity local plants, both offering alternative values to customers. Competitive strategies in steel industry According to Porter, the three generic strategies are cost leadership, differentiation and focus and they are central to achieve sustainable competitive advantage. In the case of steel industry, cost leadership is dependent upon the technology for production, access raw materials at lower costs and the ability to reach the end products to the customers with minimum freight charges. Product differentiation as a factor is relevant to the end use to which the products are applied – in some cases like general construction industry, it is not very important while in others like auto industry or for consumer durables, it is very important. Finally, focus as a factor plays important role in product positioning and marketing even in the steel industry. Appendix 1 (contd.) (last name) 4 Value chain in steel industry Michael Porter holds the concept of ‘value chain’ i.e., the chain of activities in any business along with their relative costs, as an important element of competitive advantage of a firm. Value chain is what a firm offers to a buyer and is therefore strategic to competitive positioning. Strategy, in Porter’s words, is ‘the particular combination of activities a firm adopts compared to its rivals’ (Porter 2004, p.xviii). Primary activities (logistics, operations, marketing & service) and support activities (infrastructure, human resources, technology & procurement) are to be dovetailed in such a fashion that the customer is always kept in view. In the steel industry the competitive forces being strong to moderately strong as seen above, value proposition for the buyer assumes added significance. Nucor and SWOT Analysis Risk taking ability and pioneering efforts in technology are Nucor’s forte. Compact management and work force, in spite of global scale operations of nearly 25 million ton installed capacity, makes Nucor a strong player in the industry. The significant elements of its strategy, particularly since the year 2000, have been: optimizing existing operations, growth through acquisition route, growth through exploiting green field opportunities especially in forward and backward integration mode, emphasis on value addition, and building smaller plants in strategic locations adopting latest technologies. Thus Nucor is a multi-product, multi-location and multinational producer of high value steel products (Annual Report, 2006). It has plants in Brazil, Trinidad and Australia apart from its presence in 19 states in the US. Its very successful business model is a source of attraction for predatory take-over efforts. Technology routes Appendix 1 (contd.) (last name) 5 adopted by Nucor (arc furnaces and thin strip casting) are also no longer its monopoly and are easily available for other producers as well. Future issues and suggestions Nucor has to maintain its technological edge. Energy efficiency and product development can be the areas that will sustain Nucor in the medium term. Having achieved its present size of about 25 million tons installed capacity and $15 Billion revenue, it should concentrate on product and technology development more instead of further physical expansion. Its operations have grown to an installed capacity of about 25 million tons, operating revenues in excess of $14.75 Billion and net earnings of $1.76 Billion, during 2006. Return on equity (ROE) was consistently over 30% in the three preceding years, a very healthy picture indeed (Annual report, 2006). Strong financial performance and balance sheet will deter take-over efforts and this needs to be maintained and improved upon. References Annual Report, 2006, Available at: as retrieved on July 27, 2007. Nucor/About us, Available at: as retrieved on July 27, 2007. Porter ME (2004), Competitive advantage, Free Press, New York. Read More