Nucor Corporation in 2001: Pursuing Growth in a Troubled Steel Industry.

• Risk to Cost-Conscious Culture: Continuing growth and diversification may be a risk to Nucor’s cost-conscious culture.  If Nucor continues to grow and diversify, top management might lose touch with operating realties. The more remote top management is the greater the chance that setting challenging ROA goals will result in short-term profit maximization and with greater diversification top management might not be familiar enough with the actives of varied business unit increasing the change that the short-run orientation would go undetected until it is too late.

C. OPPORTUNITIES

• Forward Integration: Forward integration into the manufacture of products that use steel made by Nucor.

• Backward Integration: Backward integration into scrap steel business

• Development of New Technologies: The steel industry of the future will require new technologies to reduce capital costs and environmental concerns.
• Buy Out Competitors: Nucor’s financial strength allows them to acquire the efficient steel making assets of financially distressed rivals at bargain prices.  

D. THREATS

• Lack of Tariff on Foreign Steel Imports: The severe pricing pressure caused by low-priced imports drove Nucor’s profits down by 68% in 2001. The steel industry market has been savaged by dumped imports, subsidized imports and increasing volumes of low-priced imports; much of it traded in violation of international rules.  The tariff will allow the domestic steel industry to obtain partial price relief, reinvest and restructure. Legislation and regulation regarding taxes, the environment, safety and health, and labor relations could be counterproductive. Antitrust issue, trade laws and non-enforcement of trade laws are also an issue.

• Competitors: Aggressive rivals acquire cost-efficient steel making assets of financially distressed companies and thus improve their competitiveness vis-à-vis Nucor.  If Nucor does not acquire some of these assets itself, they are likely to end up in the hands of their rivals.

• Substitutes: The threat of alternative materials such as aluminum and plastics.  The availability and price of scrap substitutes will greatly affect competitiveness.  The demand for low-residual, higher quality scrap will be met with scrap substitutes such as pig iron, DRI, iron carbide and liquid hot metals.  Scrap substitutes such as direct reduced iron, hot briquette iron and iron carbide will be commercially available in reasonable amounts.  The availability of these materials could put a limit on high-quality scrap price increases.  

• Over Capacity: There are two many mills producing too much steel.  Big integrated steel makers face fierce competition from mini-mills using scrap metals in their efficient electric arc furnace.  Extra capacity is likely to be an intensification of competitive pressures.  There is a surplus of steel making capacity in the world.

• Automotive Industry: Nucor’s strongest competitive material threat exists in the automotive applications. Fuel efficiency requirements have led the automobile manufacturers to consider alternative materials.  The automobile industry is by far the largest market for steel products and this represents one of Nucor’s biggest challenges.  The competitiveness in the automotive market has been enhances through the development of corrosion resistant galvanized steels that have allowed automobile companies to extend their warranties with respect to rust and stain resistance.

EXTERNAL ENVIRONMENT

A. MACRO ENVIRONMENT

• Government Regulations: The steel industry has been influenced by a growing set of government regulations and initiatives-not only regulations restricting its own practices, but regulations covering steel end used.  Penalties for violations of environmental regulations have increased significantly and include criminal enforcement measures.   Nucor is subject to environmental laws and regulations established by federal, state and local authorities and makes provisions for the estimated costs related to compliance.

• Political/Legal: Public debate over unfair steel imports is the fact there is insufficient domestic capacity to meet domestic demand and that without imports there would be shortages domestically.

• Economic: The current economic climate is excellent and domestic steel production is nearly in balance with capacity.  The continued flood of imports and the downturn the economy could affect sales prices.

• Technology: Technology is transforming the processes for producing steel worldwide.  The requirement for constant technological innovation and large capital outlay is needed in order to compete with new sources of low-cost steel.  Cost reductions have been achieved as a result of continuous technological advances.  The steel industry has invested heavily to improve its competitiveness to conform to environment regulations.

• Social/Demographic: As a result of structural, technological and operational changes in the steel industry, employment levels have dropped, while the skilled employees need to remain in the industry have changed dramatically.  Current employment is below levels of 10 years ago.  With technological change occurring at an increasing rapid pace, skill requirements will continue to evolve.  Companies have had to invest in human resource improvements, training programs at a much higher level than has been traditional in the steel industry.

• Research and Development: The steel industry of the future will require new technologies to reduce capital costs and environmental concerns. The US steel industry spends less on R & D than any of its international competitors.  The lack of R & D could be a problem for the US steel industry, although it can be argued that technology can always be purchased, making R & D less critical.  

B. INDUSTRY FORCES

• Industry Competition: High

Rivalry among competitors is fierce because technology, more creative management, increasing capacity, shrinking profit margins, high quality expectations have fueled the trend.  Rivals are jockeying for positions.  They are employing bold, innovated and risky strategies in response to a fast-changing marketplace that demanding higher quality.   

Rivalry between the traditional integrated mills and the operations of mini-mills.  There are two many mills producing too much steel.  The development of mini-mill is one of the reasons the steel industry has become more competitive. Integrated steel companies have very high fixed costs. As a consequence of its overall lower cost structure and its aggressive pricing, Nucor and other mini-mills have driven their integrated rivals from a number of markets.  

Imports continue to be a source of strong competition.  The steel industry has been severely disrupted as low-priced imports reach all-time record levels.  Over capacity is likely to be an intensification of competitive pressures.  There is a surplus of steel making capacity in the world.

• Threat of New Entrants: Low

The initial capital investment required for a new mini-mill is substantially less than for an integrated mill.  As a result barriers to entry of new players are substantially lower than it used to be.  Mini-mill can operate efficiently on a smaller scale than integrated mills.

Low barriers in terms of economies of scale.  The mini-mills benefit from locating themselves in regions where union activity is relatively weak.  The labor force tends to be non-unionized and less expensive than labor at the integrated mills.  There is a financial diseconomy associated with the mini-mills; as they have grown, the cost of scrap steel has been driven up.

• Threat of Substitute Products: High

There is a threat of alternative materials such as aluminum and plastics. The availability and price of scrap substitutes will greatly affect competitiveness. The demand for low-residual, higher quality scrap will be met with scrap substitutes such as pig iron, direct reduced iron, iron carbide and liquid hot metals.  Scrap substitutes such as direct reduced iron, hot briquette iron and iron carbide will be commercially available in reasonable amounts.  The availability of these materials could put a limit on high-quality scrap price increases.  

• Power of Supplier:  Low

The bargaining power vis-à-vis suppliers will likely increase as a result of consolidation.

•  Power of Customers:  High

Customers are driving harder bargains.  They are looking for rock bottom prices.  To counter this bargaining power big can be very beautiful.

C. KEY SUCCESS FACTORS

     The Key factors that have made Nucor successful are:

• Mini-mill technology
• Low cost leadership strategy
• Organizational Culture
• Vertical integration
• Non-Union work force
• High efficiency
• Low debt
• Creative and flexible employees
• Location of diverse facilities in rural locations across America
• Decentralized, streamlined chain of command process/maintaining a lean management structure
• Recycling steel
• Technology / Patented technologies
• High-quality  network
• Strong brand
• Unique design capabilities
• Continuous improvement
• Customer service and quality
• No lay off policy (Unique HR practices)
• Administrative efficiency through designing its structure and incentives in a way that stresses cost minimization

INTERNAL ENVIRONMENT

1. FUNCTIONAL ANALYSIS INCUDING CURRENT STRATEGY IDENTIFICATION

• Organizational Strategy/Goals/Objectives 

1. The business strategy is to be the low cost provider of bar and structural products by always producing at full capacity, pricing the product low enough to sell everything that is produced.
2. The leaders had a vision as to what would make Nucor competitive and a definite plan to achieve that vision and they communicated both the vision and the plan to everyone within the company.  The key elements of the vision and plan were the market selection, strategic capital investment, the setting of clear, measurable and attainable goals and rewards for performance.
3. Optimize existing operations.  One of Nucor’s key strategies is to grow the business and profits by continuing to optimize the performance of its existing divisions.
4. Implementing a company wide benchmarking and best practice program that will involve all employees.

(5) Focus training and development program.

6. Environmental commitment.
7. Use technology to make it easier and more efficient to do business with its customers and suppliers.
8. Additional expansions at existing mill to increase annual capacity.

9. Acquire the efficient steel making assets of financially distressed rivals at bargain prices.  
10. Growth strategy through acquisitions expanding capacity while broadening its geographic presence.

• Marketing

1. Refocusing and redefining marketing efforts in their sheet business to pursue a more value added product and service strategy.
2. Highly competitive pricing system that is less complicated than the pricing structure traditional in the steel industry.  All customers in the region are charged the same published price.  This allows customers maintain the lowest practical inventory.

• Ratio Analysis

Nucor expects to continue to generate above-average earnings from its steelmaking operations in the future. Nucor’s objective is to maintain a strong balance sheet.  Nucor has the financial ability to borrow significant additional funds and still maintain reasonable leverage in order to finance major acquisitions. Nucor’s net equity has grown from 7.8 million to 4.8 billion.  The company has not had a losing quarter.  It is one of the most profitable steel companies in the industry.  Investors need to know how must services a company sells, and how much of that total it keeps as income or profit to grow its business, or return to shareholders.  The more of each is better.

Nucor one- year sales: 4.32 Billion      Nucor one-year income: 145.70 Million

Nucor one-year sales growth: 5.60%     Nucor one-year income growth: 37.80%

        

A Company is profitable when it has increased profits (the percentage of sales they keep every year).  This is accomplished either by lowering expenses or raising prices.

Nucor one-year net profit margin: 3.4%

The debt/equity ratio show how much a firm has borrowed long-term as a percentage of its stock equity.  The lower the better:  Nucor debt/equity ratio: 0.20  

Steel Industry: 0.60

2. ORGANIZATIONAL CULTURE CLIMATE

• What makes Nucor unique is that within its capital project delivery process, it has been able to eliminate everything that is not needed, while at the same time streamlining and optimizing what is needed and selecting those best qualified to do the job.  Nucor has been effective in using it unique organizational culture in applying non-traditional strategies and design philosophies. Nucor’s culture is unique and is a product of the history under the leadership of Ken Iverson.  Underlying his remarkable energy drive and creativity was a commitment to certain irrevocable business values.  Among these was embracing change.  He adapted new and unique technology innovation that transformed the steel industry.  Another core value was egalitarianism, emphasizing the importance of all employees and creating a unique environment that erased boundaries between management and workers.  He pioneered a pay-for-performance compensation program.  His no layoff policy meant that all employees from shop floor to headquarters staff took pay cuts before there were any dismissals, when business slowed. This no frills approach to management crated a lean team which is smaller than ever and the leanest in the industry.  The new leadership established new governance that has strengthened the special culture that continues to set Nucor apart.

C.CRITICAL FACTORS

• Access to Capital: One of the most critical issues facing steel makers is a lack of access to capital. The industry’s reliance on mature private capital markets based analysis makes it must more difficult to weather turndowns in the market than it does for those companies with access to government funds. Extremely depressed stock prices prevent access to capital markets and banks will not lend because of perceived risk.

• Depressed Prices: Prices for most major steel products have been depressed globally.  Large increased in low-priced steel imports led to a downturn in the US market.

• Production Costs: High production costs are affecting mills. Production cost of integrated mills has increased along with higher energy costs, high labor costs and restrictive labor contracts, making them some of the highest cost producers.

• Imports: The size and openness of the market has lead to an increase in volume.

• Consolidation: Consolidation is necessary to restore the long-term health of the steel industry but some domestic producers do not have the resources.  The major barrier to consolidation is financial: weak balance sheets, low equity values, large pensions and lack of capital.  Consolidation will make steel industry better in terms of profitability. The bargaining power vis-à-vis suppliers will likely to increase as a result of consolidation.

• Finance: Compliance with environmental regulations is a major cost. New provisions to the Clean Air Act are adding significant costs. Rules regarding toxic air pollutants from coke ovens have resulted in the closure of some coke ovens and additional shutdowns.

• High domestic energy and coke costs have cut into profit margins: A major coke shortage is anticipated in the United States by the year 2010. The US steel industry used 27 million tons of coke per year and is a net importer of three million tons of coke. By 2010, the coke requirement will decrease to 20 million tons because of process improvements and a shift to scrap based production but the coke production could decrease to ten million tons.  This will result in a shortfall of over ten million tons, which imports may not be able to fill.

STRATEGIC ALTERNATIVES

• Continue the commitment to sticking to knitting to prevent the risks of damaging Nucor’s cost-conscious culture.

• The steel industry is plagued by excess capacity.  Nucor needs to continue to maximize production in order to minimize average cost.  These problems can be remedied by consolidation and restructuring which will reduce excess capacity. In addition to consolidation, joint ventures can reduce risk and effectively increase production on the margin.

• Join together with the US producers of steel and lobby hard for the Bush Administration to impose tariffs on foreign steel imports.

• There is a need for an iron-making process that uses coal instead of coke.

• Implement a process to recycle waste oxide.  Waste oxide represents about two million tons of material a year.  Implement a process to produce clean scrap and scrap substitutes

• Make use of R & D capabilities efficiently in order to remain competitive.  Collaborative research is desirable.  Nucor must continue its technological revolution and be a leader.

• Continue to invest in state-of-the art equipment. Computerization for monitoring and control functions throughout the mini-mill will continue to reduce labor costs and improve information flow.

RECOMMENDATIONS

The problems plaguing the steel industry (supply and demand imbalance) were exacerbated due to its punitive cost structure.  Due in part to its high labor costs the steel industry has the highest production costs in the world. Several companies have sought bankruptcy protection.  Dumping and subsidized imports will take their toll on Nucor’s market share. Severe pricing pressure caused by surging low price imports will drive the profits down.  The magnitude of new imports and their detrimental effect upon the steel industry is a call for relief.  The following are recommendations for Dan DiMicco so that Nucor can maintain its profitability and continue to have future growth potential.

• Join together with US producers of steel and lobby hard for the Bush Administration to impose tariffs on foreign steel imports:  The steel industry’s high cost structure is further complicated by the impact of unfair trade practices and dumping by foreign steel makers. These unfair trade practices have been especially aggressive over the past several years. The steel industry has been negatively impacted for years by foreign dumping of steel. The lowering of tariff and non-tariff barriers between countries will increase the competitiveness. Nucor needs to take a leadership role in the trade issue and continue to fight for a level playing field for the fair and free trade of steel.  Lobbying will allow Nucor to fight for the enforcement of existing regulations, trade laws, antitrust issues; the development of an warning system for illegally traded imports and hold those accountable for over capacity and illegal dumping of steel in the market by foreign competitors. Nucor needs to aggressively pursue federal government intervention.

• Continue to acquire bankrupted companies that will enhance value and provide Nucor with the following advantages: Geographic, product, technological, trade restrictions, no need to catch up capital expenditures and the promise of fast payback. Nucor’s growth strategy is through acquisitions and expanding capacity while broadening its geographic presence. Nucor has the financial ability to borrow significant additional funds and still maintain reasonable leverage in order to finance major acquisitions.

• Acquire or consolidate with distressed rivals and companies with threat of substitute products: Consolidation is necessary to restore the long-term health of the steel industry but some domestic producers do not have the resources. The steel industry is plagued by excess capacity.  Nucor needs to continue to maximize production in order to minimize average cost.  These problems can be remedied by consolidation and restructuring which will reduce excess capacity. Consolidation will make Nucor greater in terms of profitability. The bargaining power vis-à-vis suppliers will likely to increase as a result of consolidation.  Nucor has lost significant market share to alternative materials, such as aluminum, plastics and other composite materials.  This is well illustrated in the automobile industry where the average mass of steel per vehicle has been reduced.  Pressure to increase fuel efficiency for environmental and price concerns has caused the automobile industry to substitute plastic and aluminum for steel. The environmental concerns are part of Nucor’s strategic business consideration for securing its market share.  In response to threats of substitutes and the automobile industry, Nucor should acquire or consolidate with other companies to design an ultra light steel auto body.

• Continue to invest in state-of-the art equipment. Computerization for monitoring and control functions throughout the mini-mill will continue to reduce labor costs and improve information flow:  Technological innovation is the key driver for sustainability for Nucor. Nucor has a commitment to reduce toxic and transfers, to increase environmentally efficiencies by reducing energy use per ton of steel and improve material efficiency.  Beyond these improvements, Nucor remains tied to capital production structure and inherent environmental burdens linked to the chemical nature of the steel making processes. Nucor aggressively pursues the latest advancements and innovation in steel making around the world to determine what technology it can adapt in its facilities.  Nucor is very diligent in monitoring R & D activities in steel production processes worldwide and then aggressively implements those innovations that are proved worthy.  Continue to make use of R & D capabilities efficiently in order to remain competitive.  Collaborative research is desirable.  Nucor must continue its technological revolution and be a leader. Nucor needs to continue to seek technological breakthroughs that will make them more competitive.  

 

• Continue in the Development of the Strip Cast Process: The strip cast process has a much lower consumption of energy with the reduction of the greenhouse gas emission.  The energy efficiency of the process will result in material so thin that less energy is required and no additional heating is required after casting.  The strip cast process has many advantages such as lower capital and operating cost, reduced energy consumption and greenhouse gas emission, thinner high-value products and smaller flexible operating plants.   Nucor is financially strong in the successful application of this new technology.  This is allow Nucor to take away more of the market share from the integrated products.

• Implement Forward and Backward Integration: Steel is not a single products.  It is a whole range of products where each product has input-out linkages with a variety of other products.  Forward integration is where firms join forces with firms which product upstream products. Nucor could benefit from joining forces with firms with upstream products.  Backward integration shows that Nucor is interested in acquiring back-end support products in order to cut their cost of production. Nucor is more willing to increase its own market share by cutting their cost and offering products at lower prices. Forward integration is a step towards acquiring a larger share of the steel market.

• Continue to focus on integrated low cost strategy and low cost leadership.  Strategic Vision- “Keep on Keeping On and Improve On Cost!!!”

References:

Muriel Sibert & Company (2002, November). “Nucor Corporation-NUE Fundamentals.” Retrieved November 4, 2002 from the World Wide Web:

“Prospects for Trade in the North American Steel Industry (2001, December).”

 Retrieved November 4, 2002 from the World Wide Web:

Steel Technology (2002, September). “The Castrip and The Steel Industry.” Retrieved November 3, 2002 from the World Wide Web:

Thompson, Arthur and A.J. Strickland. “Strategic Management Concepts and Cases”. 13th edition.  New York:  McGraw-Hill Irvin.

Yahoo Finance (2001, March). “Nucor Annual Report.” Retrieved November 2, 2002 from the World Wide Web: