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Threat of new entrants: Low
The threat of new entrants is low in the steel industry. This is primarily due to the high capital requirement for entry. Firms requires huge amount of funds to achieve economies of scale. Besides, in order to comply with the government regulations and to maintain competitive advantages, significant investments on environmental control systems and manufacturing technology upgrades must be made continuously. For this reason, capital requirement is a deterrent to new entrants in the steel industry. New entrants frequently bring additional capacity to an industry. Thus it is possible that prices will be bid down and industry profits diminished.
Other barriers to entry include switching cost, access to distribution and product differentiation. These new entrant most likely will be existing rivals that have consolidated and or merged. This results in a new bigger entity and tougher rival. In addition, consolidation by foreign steel makers will also bring more competitors to the United States.
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Threat of Substitute Products: Moderate to low
Substitutes are products or services that are able to perform the function of the original product or service at a considerable price reduction. The threat of substitute products is Low to Moderate in the steel industry for the same reason the buyer power is high. Compared to the basic steel, it does not existing similar material that can be equal in durability and robustness.
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Bargaining Power of Buyers: High
The power of buyers is high in the steel industry. Basic steel is a commodity; price is usually the deciding factor. With the availability of cheap import, the company has very little pricing power. For this reason, buyer power is strong, as well as purchases are made in large volume, switching costs are low, products are undifferentiated and the possibility of backward vertical integration is high. Steel producer have only been able to raise prices with enforcement of limited imports. In addition there is still over capacity in the industry causing excess supply that drives down prices. For the moment buyers still consider influence in the industry, as producers continue to consolidate this situation may change. Buyers have the power to choose who to buy this commodity from.
- Bargaining Power of Suppliers: High
Depending on the type of input, the power of suppliers is generally high in the steel industry. Steel is energy-intensive; the industry’s profitability is greatly dependent on the energy costs. Most companies have no choice but to take whatever prices offered by the suppliers; energy suppliers have tremendous influence on the steel producers.
For raw materials such as scrap or iron ore, the suppliers’ power is relatively lower; large firms particularly are in a more favorable position to negotiate prices. Scraps used to be considered as low-cost, but as more and more mini-mills are built, the growing demand for scrap is driving its price to escalate. In order to offset the strength of supplier power, steel industry firms must incorporate new avenues for innovation and vertical integration to reduce the dependency on scrap steel metal.
In some industries suppliers can be quite powerful as a result of the implicit problem of switching costs. The power of supplies will continue as long there over capacity in the industry, many buyers in the industry, and few substitutes.
As a result of this, we can conclude that the intensity of competition within the industry is high. A very high capital investment required a large number of competitors in the market, an industry that is over producing and the product itself (commodity, very low product differentiation). All of this tends to say that they are market with a lot more possibilities and expectations to invest in than the steel market.
- What driving forces do you see at work in this industry? Are they likely to impact the industry’s competitive structure favorably or unfavorably?
The driving force of this industry at this period is the fact that domestic steel producer can produce at a lower cost than foreign competitors, indeed, the influx of steel products dumped into the U.S at relatively low prices. This allowed foreign companies that were housed domestically in the U.S to acquire materials at lesser prices, while cutting their production costs.
As the foreign competition is less intense and the costs of productions lower, the domestic competition is more intense and profits are expected interesting. But this will probably in the medium-run be unfavourable for the U.S steel market because of the high prices due to the intense competition inside the U.S.
But thanks to the legislative environment of the U.S Steel Market, domestic producers are protected by a 35% tax on foreign producers, so this weakness will be available only outside the U.S.
- How attractive are the prospects for future profitability of U.S. steelmakers? Should Nucor consider expanding in this type of industry environment? Why or why not?
The prospects for future profitability of U.S. steelmakers are more likely to be attractive when they are considering merging with others rather inside or outside the U.S. In fact Nucor should definitely consider expanding in this type of industry environment by merging with smaller companies to expand their production capacity and their geographic market presence.
Also, as developed previously, the inner U.S competition may affect the competition with foreigners, so high profits made in U.S might be balanced by lower revenue made outside its frontiers and therefore might make the situation less expensive inside U.S. That is why, Nucor has better to establish joint ventures and mergers with companies than currently have a plan to build and operate its own steel mills outside the US.
- What type of strategy has Nucor followed? Refer to the corporation’s corporate, generic strategies as well as the strategic options concerning timing. Is there any reason to believe that Nucor has achieved a sustainable competitive advantage over many of its steel industry rivals? If so, what type of competitive advantage does Nucor enjoy?
Nucor follows a low-cost provider strategy, as it primarily aims to provide a generic product to customers, at the lowest price available in the industry. Concerning the strategic options concerning timing of entry, Nucor is a leader - offensive. The commercializing of new technologies and new plant construction was a big part of the growth strategy and helped keep Nucor a leader in technology.
Nucor has achieved a sustainable competitive advantage over many of its steel industry rivals, which is its strong labour relations and management. During the seventies and eighties, Nucor achieved worker productivity of four labour hours per ton compared with the national average of eight per ton. Even foreign competitors were capable of just six labour hours per ton. Ironically, Nucor was widely known in the industry as one of the highest paying steel employers with an employee turnover extremely low.
- What are the specific policies and operating practices that Nucor has employed to implement and execute its chosen strategy?
To implement and execute its low cost provider strategy, Nucor has employed specific policies and operating practices. First, the company aggressively pursues and implements cost savings technologies as their initial principle to produce steel more cheaply from recycled scrap steel. Nucor is considered as a technology leader and focus on the introduction of disruptive and leapfrog technologies. Therefore, the company creates a low cost culture at each level. For example, the offices of executives were simply furnished. There were no company planes or cars.
However, Nucor is regarded as the most modern and efficient company in the United States. There is a strong emphasis on employee relations and workforce productivity. Nucor gives incentive compensation to employees, which motivate them to manufacture above the average. Besides, plants are automated, requiring fewer operating employees and allow the company to operate in a just-in-time inventory mode
Finally to sustain its strategy and continue to grow, Nucor enter into joint venture with foreign companies searching or expanding new steelmaking technologies.
- What does a SWOT analysis reveal about Nucor’s situation? Does Nucor have any core or distinctive competencies?
SWOT Analysis
Nucor’s key strength is their people. The lean organization structure has created strong leadership at all levels by being able to make quick decisions and being accountable for it as well as sharing their success and failures with each other. The egalitarian approach towards employee benefit and welfare, compensation based on group performance and production quality, training and an approachable management which practices open communication that has created a highly motivated, productive, and flexible workforce. Nucor’s superior financial performance is the best in the industry in United States; it has a strong financial credibility with low prices and high profit margins. It is also North America’s largest recycler. Nucor has good technologies such cast striping and the HIsmelt process. Nucor has great productivity and operational efficiencies such as incentive pay system, and good production operations that support these competitive strengths.
However, there are weaknesses as well. Nucor has limited global presence knowing that almost all Nucor plants are in the US; making it difficult to compete with Asian manufacturers with lower production costs. Production is energy intensive (20% of total cost). Nucor is dependent on scrap metal (getting scarce and costlier as well as volatile).
There are a lot of opportunities for Nucor to expand through mergers and acquisitions, to perform R&D to find alternative to scrap steel which is becoming too expensive, and also to find another type of energy. There is also further opportunity to export steel to emerging markets such as India, China, and Russia where the demand is growing.
The major threats that Nucor are facing are increased competition due to globalization, scarcity & rising raw material and energy costs, cyclical demand for steel products, tougher environmental laws and free trade agreements which allows foreign players who have cheaper labor force, reduced regulation and unfair subsidies to have the cost advantage. And it must also face aggressive rivals that are becoming proficient at cost cutting.
Conclusion: Use financial strength
- to expand in emerging markets in order to gain business
- to innovate and find an alternative to scrap metals & other type of energy
Core competencies are capabilities that serve as a source of competitive advantage for a firm over its rivals. It is stated in Nucor’s corporate mission, Nucor’s goal is to Take Care of Their Customers. They are accomplishing this by being the safest, highest quality, lowest cost, most productive and most profitable steel and steel products company in the world. This statement also perfectly describes Nucor’s core competency which are four in number;
Valuable capabilities help a firm neutralize threats or exploit opportunities in its external environment. Nucor’s capabilities meet this criterion. Its efficient steel mills manufacture high-quality; low-cost products which not only bring great values to the customer but also allow Nucor to stay competitive facing cheap imports.
Rare capabilities are capabilities that few, if any, competitors possess. Basic steel is a commodity. Many of Nucor’s rivals, especially those in Nucor Corporation Europe and Asia, are also capable of producing steel products at competitive cost. Nucor’s capabilities do not meet the rare criterion.
Costly-to-imitate capabilities are capabilities not easily developed by other firms. Nucor’s most successful core competency can be attributed to its Culture. The former president, Ken Iverson, described Nucor’s success as “70% culture and 30% technology.” Because of the causal ambiguity and social complexity characteristics of its organizational culture (e.g. commitment to the employees and decentralized structure), Nucor’s capabilities are difficult for rivals to emulate, and hence qualify as core competencies.
Non-substitutable capabilities are capabilities that have no strategic equivalents available to the rivals. The combination of Nucor’s resources (e.g. financial strength, technological know-how, reputation, and human resources) makes Nucor’s capabilities non-substitutable, in particular among the U.S. steel producers.
- What recommendations would you make to Dan DiMicco?
The following recommendations are addressed to Dan DiMicco, in order to continue achieving high growth and profitability:
- Nucor can acquire Mittal Steel in order to dominate the domestic US market.
- The company needs to continue the program called BESTmarking, aimed at being the industry wide best performer on a variety of production and efficiency measure. This measure allows ensuring product quality and reassure customer.
- To expand internationally especially to emerging regions which includes India, China, Brazil and Russia through joint-ventures with local partners. This is to take advantage of low production cost and develop new techniques. Besides, licensing technology as HIsmelt can be an opportunity to Nucor.
- Nucor need to develop a new low cost substitute for scrap steel and iron which are vulnerable to price rising.
Source:
Nucor Corporation: Competing against Low Cost Steel Imports by Arthur A.Thompson