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Why has Nucor performed so well in the past?

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Introduction

Kirrily Van Riel Why has Nucor performed so well in the past? The following section discusses the reasons that Nucor has been able to perform so well in the past. It examines the internal and external (industry) factors impacting success. Industry Analysis This section examines industry forces using Porters Five Forces Analysis (See Appendix 1). Porters Analysis illustrates that both Industry Competition and Barrier to Entry are HIGH. Threat of Substitutes and Buyer Power are Medium and Supplier Power is Low (See Appendix 1 for detailed analysis). However, even in the face of such stable and fiercely competitive market, Nucor was continually able to maintain its strong position within the industry. Thus we now look to Nucor's internal characteristics as a source for competitive advantage. Internal Analysis This section compares Nucor's superior resources and capabilities to its competitors, and discusses how it has exploited them for competitive advantage. Resources Capabilities * Strong Financials Resources with forecasted growth in cash flows further strengthening its investment or borrowing capacity. * Pioneering technology and technical sophistication in Thin Slab casting * Critical Mass of existing Mills and geographic locations in proximity to customer base. * Its reputation, brand equity and relationships with suppliers within the industry. * Its large existing customer base. * Its highly motivated workforce, build through a series of performance goals and "high powered performance incentives" (Nucor Case, 1990) * Lower cost production through pioneering technology. * Technological Superiority for greater efficiency in volume production * Rapid supply to assist in low inventory levels for customers. ...read more.

Middle

The SWOT points out that whilst Nucor's strengths far outweigh the weaknesses, so to do the threats outweigh the opportunities. Thus, by combining these factors, the market attractiveness can be illustrated in the BCG Growth Share Matrix (below). The analysis places the new market in the "Star" quadrant. Here the market is characterised by high earning potential and strong cash flows deeming the overall the market an attractive one. Economic Attractiveness An NPV model is used to assess the viability of expansion into the Thin Slab Market. A summary of the NPV analysis is attached in Appendix 3. The model identifies the project as NPV positive after 11 years. It also makes some assumptions about the mix of cold and hot rolled produced and the capacity and utilisation rates attainable. With these assumptions in mind there are a number of points that should be noted about the economics of the model. 1. The project is cash flow positive but only after 11 years. This is a long and unlikely lifecycle in an industry that is characterised by changing demands and technologies. 2. The discount rate 9.41% (from the case) is an unlikely one. In fact it is probably a lot higher than this, extending the payback period beyond 11 years. 3. It doesn't take into account tax implications, tax shields, or depreciation which would have a negative impact on the payback period if incorporated. 4. It assumes that revenue and cost forecasts remain constant over the payback period which is an unlikely scenario. ...read more.

Conclusion

In addition there are many factors working against sustaining competitive advantage and not many for this argument. However, the fact is that we know Nucor entered the TSC market and made significant profits through the early 2000's. But, given the economics of the model, and all the factors adding up to no-one would ever recommend to go ahead with the investment. Hindsight is brilliant though so perhaps Nucor had its disposal more information than was disclosed at the time of the case, or maybe Nucor just kept a strong focus on their strategy of, "building steel plants economically and operate them efficiently." (Nucor Case, 1990) STRENGTHS OPPORTUNITIES * Size and Scale - Largest Mini Mill & 2nd Largest Steel Producer in US. * Low Cost Leadership Strategy * Quality and Reputation: Reputation for consistency in quality * Technological Leadership - Pioneering of Thin Slab Casting for competitive edge * Financial Strength - For growth and acquisitions * First Mover Advantage - First plant in the world for thin slab casting * Geographical Strength - Location of Mini Mills to customer base * Organisational Culture - Strong focus on employee relations, training, reward and recognition * Diversification Opportunities - Move into manufacturing to take advantage of vertical integration * Technological Development - Advanced technical capabilities for new markets and products * Financial Strength - ability to buy out small operators for further growth WEAKNESSES THREATS * Resource Dependency - Scrap Metal * Organisational Structure - Highly decentralised impacting its growth potential * Resources and Capabilities - geared around narrow product range - risk to further diversification and growth * Cost of Resources - Rising Price and reducing availability of scrap metal, rising costs of energy. ...read more.

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