The Uniqueness of Nucor Corporation - Case Study Example

Running Head MBA Case - Nucor Corporation MBA Case - Nucor Corporation Nucor is one of the leading steel companies operating in the USA and Canada. The driving force behind world economic growth has changed from manufacturing volume to improving high quality. As a result, the key success factor for many firms including Nucor is maximizing high quality. Rather than price, quality has become the dominant influence on customers' perceptions of value (Nucor Corporation 2008). Thus, strategy refers to the means a firm uses to reach its ends. Fundamental to every firm's mission and competitive strategy is its value strategy. Generically, a value strategy is the pattern of decisions and actions that constitute the firm's overall approach toward providing realizable net value to customers. A value strategy inherently involves all parts of a firm's functional and organizational strategies that provide value realized by customers or require sacrifices by customers (see Appendix Table 1) Nucor follows a four-part growth strategy to increase its production capacities and quality that improve product quality. This strategy: "involves new acquisitions, new plant construction, continued plant upgrades and cost reduction efforts, and joint ventures" (Thompson et al 2008 p. C 115). Despite the use of strategic management process and content models, many managers fail to maintain or improve their firm's competitive position. The new globally competitive context requires that top management alter its current predispositions toward certain stakeholders and financial performance measures and refocus on continuously improving net customer value. "By 1985, Nucor had become the seventh largest steel company in Alnerica, with revenues of $758 million. With 18 plants having the capacity to produce 25 million tons of steel annually, 2006 revenues of$14.8 billion, and net profits of$I.8 billion" Thompson et al 2008 p. C-113). These changes suggest new strategic management processes and new strategy content paralleling those in current models. All firms have a value strategy, but few have completely conceptualized and clearly articulated value as the basis for competing. In fact, many firms are more competitor-oriented than customer-oriented. As a result, many managers are more familiar with their firm's competitive strategy than its strategy for improving customer value. Some inadvertently compromise net customer value either by producing products/services perceived to be of low quality or by requiring excessively high sacrifices of customers. Ironically, the most competitive firms are the customer-oriented, not the competitor-oriented firms. In financial terms, "new plant construction and boosting tons sold from 11.2 million in 2000 to 22.1 million in 2006" (Thompson 2008, p. C114). The uniqueness of Nucor is the synergistic combination of low cost and differentiation that may come with a value-based strategy is a direct result of managing critical systems that contribute to value. For Nucor, the acquisition process is limited to broadening the product line is erroneous (Nucor Corporation 2008). Many other business goals can be fulfilled by acquisition. These include strengthening the company's financial position, procuring the services of one or more key personnel or new executive talent, obtaining land, buildings, and equipment for expansion, stabilizing cyclical or seasonal types of business, avoiding concentration in a government-regulated area of industry, acquiring the technical skills of highly trained scientists, and many other critical elements in business which determine growth and success. The process of acquisition, then, is one that ought to be considered by the management of any enterprise as its plans for growth are executed (see Appendix Table 3,4). Acquisition is one way to be considered in achieving the complete set of defined objectives. And many companies have found it a very satisfactory way. Annual report shows that acquisition strategy allows the company to achieve a steady growth and increase its revenues. "As part of our long-term growth strategy (Nucor Corporation 2008). Nucor continues to invest in existing operations, make greenfield investments utilizing advantageous new technologies, pursue acquisitions that are accretive to earnings and to pursue international growth. Capital expenditures in the steel mill segment totaled $216.0 million, $195.5 million and $410.0 million in 2005, 2006 and 2007, respectively" (Nucor Annual Report 2008). To produce and deliver value for customers, managers develop a profound knowledge of the systems and processes and understand the leverage points. The differentiation strategy offers more variety in routes to competitive position if customers value a number of attributes (Nucor Mission 2008). 2. The uniqueness of Nucor is that its changes reorganizations involve four components: capacity, facilities, technology, and vertical integration. Capacity decisions have to do with the amount to be installed, the timing of increases, and the type (large blocks versus small incremental). Facility decisions include the size of plants to be built, the location of plants and distribution centers, and the specialization of the plants relative to breadth of product lines. Technology decisions involve whether new equipment will utilize existing versus new technology, the level of automation planned for existing and new equipment, and how closely equipment will be tied together (Nucor Mission 2008). Finally, vertical integration decisions encompass the direction of integration (forward versus backward), the extent of integration, and the balance of internal versus external capabilities. Defining infrastructure also involves four components: workforce, quality, production planning and control, and organizational structure. Workforce decisions include establishing the planned skill level for employees, determining how skill level will influence wages, and firming practices for handling employees during swings in the business cycle. Quality decisions encompass selecting between prevention, monitoring, and intervention as the basis for providing the desired level. Production planning and control decisions involve deciding on sourcing policies (limited number versus low bid), selecting between centralized versus decentralized procurement practices, and establishing decision rules for meeting commitments on delivery dates (Thompson et al 2008). Nucor's decisions include establishing a formal structure, defining the level in the organization that selected decisions are to be made, formulating the role of staff groups, and effectively communicating the reward system for recognizing outstanding performance. The route to competitive position, therefore, is to excel in one of the dimensions and to be competitive in the others. Prioritizing the dimensions will allow the organization to define desired structure and infrastructure and to resolve any conflicts that might occur. As with the strategic management process, a reorientation of emphasis in selecting strategic capabilities is proposed. The selection of strategic capabilities directly impacts the identification of critical systems. Management's ability to anticipate how the value of those capabilities might change over time affects the way systems are studied and designed. "In June 2006, Nucor announced plans to construct its fourth sheet steel galvanizing facility at its sheet mill in Decatur, Alabama, with a capital budget of about $152 million. Annual capacity will be approximately 500,000 tons per year and the facility will galvanize up to 72-inch wide sheet steel. Start-up is expected in mid-2008. The addition of this facility will increase Nucor's total galvanizing annual capacity by one-third to 2,000,000 tons" (Nucor Annual Repot 2008). Nucor's management ultimately developed a strategy to increase the volume of profitable products while deleting those that were unprofitable. They made this transition by enhancing their capabilities in the areas of quality and service, service taking the form of reliable deliveries. They further decided selectively to identify higher leverage opportunities for improvement, focusing on those areas that would be very highly valued by customers such that improvements would be recognized in a short timeframe. What strategic capability is to be achieved It should identify all internal and external customers of the system (Thompson et al 2008). 3. SWOT analysis shows that Nucor has achieved its stable growth because of investments and R$D activities. The advantage of Nucor is that it is exclusively interested in earning the highest level of future cash flow for a given amount of risk. This view suggests that Nucor selects a well-diversified portfolio to achieve this goal. Accordingly, Nucor is unwilling to pay a premium for corporate behavior that can be described as socially responsible. Under the traditional view, to the extent that corporations engage in costly behavior to achieve socially responsible goals that cannot be translated into higher cash flow in the future, investors would be expected to place a lower value on corporate securities (Thompson et al 2008). The opportunity for Nucor is that the prediction that investments might lead to better firm performance cuts across the ideological spectrum. Effective managers need to satisfy all important stakeholders, not simply the demands of shareholders. Further, it is plausible to assume that meeting the needs of consumer groups, environmental activists, labor unions, the government, and other stakeholders is becoming more important to corporate managers. Nevertheless, it may not be accurate to suggest that the demands for social responsibility are always external to the corporation, as the stakeholder model implies (Thompson et al 2008). The main weakness is increased competition and economic instability. Businesses run most effectively when they are in a proper state of balance with their market environment. This alignment depends on organizational arrangements, both internal and external. Since markets are dynamic and consist of threatening competitors, managers must continually review their organizational patterns. Environmental forces and the existing business system together are critical factors shaping organizations like Nucor (Thompson et al 2008). A balanced state of adjustment must be reached between them. Even though company environments establish conditions that marketing organizations and behavior must fit, internal and external organizational balances can be achieved. Internal adjustments occur through changing authority-responsibility relationships and departmental structures. External adjustments occur through the marketing mix and through the distribution network. The main threats are financial risks and investment risks. No one organizational arrangement has universal application. Each company in its market environment has particular requirements, and markets and companies are in a constant state of flux. There are, however, certain models or patterns of' organization that serve as approaches to the specifying of organizational arrangements (Thompson et al 2008). 4. Industrial organization economics suggests that a firm's performance is directly related to the degree to which it can achieve and sustain competitive advantage, a view based on rivalry between competitors rather than providing for the needs of customers (Thompson et al 2008). Financial results shows that "Steel shipments to outside customers decreased 2% to 20,235,000 tons in 2007 from a record 20,649,000 tons in 2006" (Nucor Annual Report 2008). It refers to those parts of a firm's external environment that are potentially relevant to goal setting or goal attainment. But researchers seldom suggested what those goals should be. Organizations predisposed toward providing and improving customer value will consider different factors than those firms predisposed toward expecting financial performance. "Capital expenditures in the steel mill segment totaled $216.0 million, $195.5 million and $410.0 million in 2005, 2006 and 2007, respectively" (Nucor Annual Report 2008). Both the subprocess and the content of this second component will differ significantly from current practice. A value-based organization continuously studies the factors that influence net value perceived by the customer as well as the factors that influence the organization's capacity and capability necessary to provide that value. But in addition to assessing political, economic, social, and technical changes for impacts on the firm, managers should determine the effect of any such trends on customers' perceptions of realization and sacrifice. They refer to future periods of time, and translate company plans into financial resources. They furnish a guide for future expenditures, and by helping to guide actual performance toward budgeted performance, assist in the achievement of objectives. Budgets establish expected relationships among a number of factors in need of control, such as expenses for advertising, product planning, personal selling, and product development. They may be thought of as short-run aspects of planning. "Gross interest expense increased approximately 27% primarily due to increased average debt outstanding, accompanied by increased average interest rates. During the fourth quarter of 2007, Nucor issued $1.3 billion in notes at rates slightly higher than the majority of the existing debt. Gross interest income decreased approximately 41% primarily due to a decrease in average investments" (Nucor Annual report 2008, see appendix Table 2). 5. The main advice for Dan DiMicco is to continue current strategy and financial investments in plans and production. Through a check of actual against budgeted performance, discrepancies can be noted, the reasons for them analyzed, and the need for adjusting marketing activity pointed out. This activity provides management with the basis for sound marketing control. Even where standards are set, however, it is not expected that performance will correspond exactly. Rather, tolerances are established and corrective action is taken when performance falls outside the range of tolerance. Product strategy is usually couched in terms of product success. However, management must be realistic about product failures -- new-product failure must be part of overall company expectations. Of course, newproduct failures can be eliminated by going out of business. But staying in business implies that new products will be developed and some will fail. Companies must determine an acceptable failure rate for their new products. Low failure rates are not always complimentary statistics, since they may indicate a lack of innovative ability and risk-taking (Thompson et al 2008). Product differentiation may be concerned with minor variations, adjustments, or adaptations in a product, such as in varying the kinds of filters in cigarettes, filter flows in automatic washers, or chrome molding or grills on cars. It may also be imparted by varying the package or color of the product. Or it may be achieved through a totally redesigned product or a technological breakthrough, as in the use of transistors in electronic products. Companies that differentiate products are faced with the need to instill an image in the minds of customers that distinguishes their products from others and causes the customer to react more favorably toward them. This might be the result of the image of the company itself, its distributors, or the product per se. Product differentiation gives marketers a share of a broad, horizontal market, whereas market segmentation tends to result in cultivation of a market position in depth. Given the analogy of a layer cake, product differentiation seeks to secure a layer of the cake, whereas segmentation seeks a wedge. References 1. Nucor Annual Report 2007. (2008). Retrieved 17 June 2008 from http://www.nucor.com/ 2. Nucor Corporation: Competing Against Low-Cost Steel Imports (2008). Retrieved 17 June 2008 from http://www.nucor.com/ 3. Nucor Mission. (2008). Retrieved 17 June 2008 from http://www.nucor.com/indexinner.aspxfinpage=aboutus 4. Thompson, Arthur, Strickland, A.J. and Gamble, John. (2008). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concept and cases, 16th Edition. McGraw-Hill Irwin. Boston, MA. pp. 113-135. Appendix Table 1 Financial Highlights. Source: www.nucor.com Table 2. Net Interest expense Source: www.nucor.com Table 3. Property, Plant and Equipment. Source: www.nucor.com Table 4 Debt statement. Source: www.nucor.com Read More