Nucor Corporation - Steel Production - Case Study Example

Nucor Corporation - Steel Production Executive summary This paper gives a brief background of the rise of Nucor Corporation to market leadership in the US steel industry. However, the company is facing two major challenges: a declining US market and increased competition from low-cost importers within the same market. As a low-cost leader, having rivals produce at lower cost is a death sentence for the organization. The paper analyses the US steel industry using Porter’s five forces and performs a SWOT analysis in order to advice the Nucor CEO on the best approach to take to keep his organization competitive in future. Table of Contents Executive summary 1 Problem statement 2 Analysis 3 Conclusion and Recommendations 5 References 5 Appendix A: US Steel industry five forces analysis 7 Appendix B: Nucor Corporation’s SWOT analysis 9 Background In 2006, Nucor Corporation was the second largest steel manufacturer in the United States. The company had experienced remarkable growth since 1966, when it decided to fully focus on the Steel business. This was demonstrated by Nucor’s ability to earn a profit in every quarter and every year from 1966 to 2007 in a mature and cyclical industry (Thompson, 2010). Nucor was able to experience its success largely due to its low-cost strategy and the great leadership provided by its CEO Ken Iverson. Iverson instituted into the company five best practices that Nucor converted into core competencies. These were: “pursuit of innovation and technical excellence; rigorous quality systems; strong emphasis on employee relations and workforce productivity; cost-conscious corporate culture and focus on achieving low cost per each ton of steel produced (Thompson, 2010, p. C–194)”. However, in the current period the US steel industry’s competitive structure is facing three industry changing factors that are bound to make the market unfavorable for Nucor. Problem statement Industry consolidation, globalization and threat of low-cost imports are the three driving forces that are going to make the US steel industry’s competitive structure unfavorable. Nucor Corporation’s low-cost strategy has served it well within its US market largely because its key competitors have been unable to replicate its low-cost operations, organizational structure and management philosophy and its human resources strategy. However, the problem is that with globalization, foreign-based companies have access to the US market and they are able to beat Nucor in its low-cost leadership strategy. Nucor has only one fully owned manufacturing site outside the US, and thus it is unable to benefit from some of the locational advantages that these foreign companies have such access to raw materials and cheaper labor. This brings to question the company’s competitiveness in the global marketplace. A pertinent argument here would be to find out whether Nucor’s market leadership in the US is a result of the US International Trade Commission’s regulations on steel imports or not. Analysis To enable us to understand the industry structure and the primary competitive forces impacting U.S. steel producers in general and the producers like Nucor that make new steel products via recycling scrap steel in particular, Porter’s five forces analysis is used. The analysis is presented in Appendix A. On the other hand, a SWOT analysis is also conducted in Appendix B to assist in identifying Nucor’s specific weaknesses and strengths which shall then be compared with the opportunities and threats identified by the five forces analysis in order to come up with suitable strategy for the company to sustain its competitiveness and future survival (Gillespie, 2007). From Appendix A, the two forces that Nucor has to be wary off are power of buyers and industry rivalry. From the case Nucor utilized its marketing and operations strengths to lower buyer power. Using its strong brand image and its just-in-time production system Nucor was able to assure customers to enter into 6- to 12-month contracts to purchase steel mill products from Nucor (Thompson, 2010). This increases switching costs for buyers and lowers their bargaining power. However, the company has been unable to adequately address the threat posed by the intense industry rivalry. Nucor can boast of being the cost-leader in the US but cannot, with certainty, state to be the same globally. With globalization this remains a real threat given that other global players are eager to take part in the lucrative US steel market by exporting their products – which is also our problem statement. From Exhibit 7 in the case, consumption of steel products in North America has steadily been decreasing whereas it has been on an upward trend in Africa, Middle East and Asia. This could imply a possible reduction in sales and hence profitability in the US for Nucor corporation especially given the increased competition from low-cost imports. For this reason, a continued expansion strategy in the US alone by Nucor will be an imprudent move. Nucor needs to expand outside of the US to effectively compete not only against the low-cost imports but also to gain the economies of scale necessary to compete globally. For long term success, Nucor will need to exploit the growing markets in Asia, Africa and Middle East if it to compete with the likes of Acelor Mittal. Nucor’s success has largely been due to the great execution of its low-cost strategy under great leadership. Under Ken Iverson, Nucor created an organizational culture that valued employee empowerment, decentralized management structure and continuous innovation to lower cost per ton produced. Employee empowerment is demonstrated through policies such as incentive based pay that rewards teams rather than individuals, dissemination of company and division performance to all levels of staff and giving floor workers the opportunity to share ideas on how best to improve work processes. Decentralized management structure is demonstrated by the head office’s minimal interference with the factories unless their managers are finding difficulties in meeting the set targets. This sense of autonomy is motivating to the factory managers and their staff and hence improves their performance. Finally, Nucor’s continuous investments in upgrading technologies so as to derive more efficiency from their steel mills have ensured that the company keeps a step ahead of its competitors in cost leadership. Over the years, the company has succeeded in transferring its cultural paradigm to the businesses that it acquires. This means that there is a high likelihood of its doing the same if it pursues a similar approach abroad. Considering that the US steel market is decreasing – as per Exhibit 7 of the case – this particular attribute gives strong reason for the organization to seek international expansion through acquisitions rather than through joint ventures. Moreover, from its consistent growth and success over the years Nucor’s core competency seems to be its dynamic capabilities. Dynamic capabilities refer to high-level routines and resources that are used by a firm to modify its existing operational capabilities. They govern the rate of change of ordinary capabilities (Storck, 2009). This implies that Nucor is able to systematically generate and modify its ordinary capabilities (employee empowerment, decentralized management structure and continuous innovation) in pursuit of improved effectiveness. Conclusion and Recommendations Nucor’s ability to modify its ordinary capabilities over the years has ensured that it has remained the cost leader in the US. However, with globalization and industry consolidation it finds itself having to compete with global giants such as Acelor Mittal and low-cost importers in its declining US market. The prudent thing for the Nucor CEO, Dan DiMicco, to do would be to begin a more aggressive international expansion strategy. Nucor Corporation is in good financial health as demonstrated by its consistent profitability since 1966, good interest coverage and current ratio. This means that the company can easily access the necessary financial resources from external investors or lenders for its aggressive international strategy. Moreover, the company can use its experience in international joint ventures to guide it on best approach to use on its international expansion. References Gillespie, A. (2007). Foundation of Economics. Oxford: Oxford University Press. Porter, M. E. (2008). The Five competitive forces that shape strategy. Harvard Business Review Online, R0801E, 1–18. Storck, J. (2009). Strategic and Operational Capabilities in Steel Production (Doctoral Thesis). KTH School of Industrial Engineering and Management, Stockholm. Thompson, A. A. (2010). Nucor Corporation: Competing against Low-Cost Steel Imports. McGraw-Hill.  Appendix A: US Steel industry five forces analysis Industry force Impact on business Barriers to entry - High 1-High capital requirements 2-Moderate to low industry attractiveness because of the highly cyclical nature and low differentiation of products and industry consolidation. 1-Businesses that want to venture in the steel production business will need to invest large financial resources for fixed facilities and equipment. 2- If the industry is attractive and is expected to remain so, investors will be willing to fund new entrants (Porter, 2008). Power of suppliers – Low 1-Overdependence on scrap steel as raw material means that suppliers are guaranteed of market. 2-There is the threat of big industry players such Nucor to integrate backwards in order to sustain their low-cost strategy 3-Industry consolidation has drastically reduced number of buyers. Also big players such as Nucor purchase very large volumes of scrap steel 1-Product prices are primarily driven by the cost of raw material 2-The threat of backward integration lowers the power of buyers. 3-With industry consolidation, buyers of scrap steel have become more concentrated than suppliers thus increasing their bargaining power. Power of Buyers – Moderate to High 1-Industry products are largely undifferentiated 2-Buyers face low switching costs 1-Given that steel products are largely standardized competition goes down to price which transfers value from the producers to the buyers (Porter, 2008). 2-Buyers easily move to purchase from competitors when they want better prices Industry rivalry – high 1-Mature industry 2-High exit barriers 3-Price competition because of low buyer switching costs, and largely standardized products. 1-When faced with a slow growth industry, industry players fight for market share. 2-Steel production requires huge capital investments in technology and equipment. According to Porter (2008) this makes companies prefer to remain in the market even where their returns are low rather than fold up. Such companies sustain excess production capacity which into the industry’s profitability 3-Price competition transfers profits directly from an industry to its competitors (Porter, 2008). Threat of substitutes – Low 1-One may view plastics or aluminum as potential substitutes to steel however the uses for steel in its largest market, construction has largely remained intact. 1-To mitigate the threat of substitutes steel producers will need to manufacture a broad array of steel products with varying compositions to keep them competitive against aluminum, plastics and other substitutes Appendix B: Nucor Corporation’s SWOT analysis Strengths Weaknesses Marketing - Strong brand and large distribution network in the US -Primarily focused on the US market thus lowers the strength of its brand, products, distribution globally Financial -Current ratio has been greater than 1 from 2000 – 2006 -Interest coverage (EBIT/Interest expense) is greater than 1 which implies that the company can generate enough cash flow to pay its interest expense -Profitable since 1966 Operations -High worker productivity -Value chain with fewer production steps -Just-in-time production system -High production efficiency keeping energy costs lower than 10% of revenues in 2004,2005 and 2006 (Thompson, 2010) Human Resource Management -Incentive pay plan exceeded industry standards -Employees empowerment / employees kept well informed on company and division performance as well as on bonus payment system -New employees provided with personalized training plans that included feedback and coaching from management -Implied no layoff policy guaranteed employees job security / very low labor turnover Read More