Nucor Competitive Strategy Essay Example

alleged to have violated federal and state clean air rules and discharge of 6,720 tons of pollutants into the air each year by U. S. Environmental Protection Agency.

Demographic

Mini-mills which are located close to customer base has moved as population of U. S. moved to south and west. Demographic shifts affect the industry since construction utilizes a significant amount of steel.

Global

U. S. steel exports were negligible although it had grown to 3% to 5% by the 1990s6. The U. S. steel industry has benefited greatly from the Japanese mill from their large investments in U. S. joint venture projects, new technologies, high productivity and quality product7. Globalization will subject U. S. steel makers to vulnerable changes.

Industry Analysis Porter’s Five Forces Analysis

Threat of new entrants

For mature integrated steel industry, threat is low due to economies of scale, high capital injection, cyclical nature of business and difficult access to supply and distribution; but slightly higher for mini-mill because of lower capital commitment and scale. .

Bargaining power of suppliers

For integrated steel makers, they have effectively neutralized the suppliers’ bargaining power by backward integration (steel makers acquiring coal/coke mines and transportation facilities). For mini-mill, their reliability on scrap metal has given supplier moderate to high bargaining power.

Higher cost of scrap metal due to limited supply has forced mini-mill to more costly materials like iron carbide. Nucor reduced the bargaining power of steel scrap supplier by backward integration.

Bargaining power of buyers

It is weak to moderate since producers can threaten major distributors and wholesalers with forward integration (taking over direct distribution). But the large buyers (e. g. car makers) have more bargaining power.

For example, the U. S. steel producers had to fulfill

Japanese automakers’ quality and standards before they were allowed to supply the Japanese auto plants in the U. S. 9 2. 2.

Threat of substitute products

The threat is high in applications where strength is a not crucial concern but cost is (e. g. lastic, wood, synthetic materials, fiberglass); low for applications that require strength since substitute materials are just not strong enough10. Also, the many composition steel can be produced reduce the threat.

Intensity of rivalry

It is a highly competitive market with high exit barriers since assets are specialized, increase of mini-mill competitors taking on production of steel sheets and other steel products, stagnant demand, many global competitors, commodity-like products that minimizes switching costs and customer loyalty and excess capacity11.

Competitive Environment Analysis

Nucor has grown to become the largest steelmaker in the US by tonnage.

To have a sustainable market leader position, it must continue to compete for more market share from the large, integrated steelmakers. Although Nucor is the first mover in the mini-mill sector, it must also compete against second movers.

Future objectives

Nucor’s primary objective is “the production of high volumes of quality, low-cost steel.

”12 It has an ambitious annual earnings growth of 10-15%. Nucor’s competitors would have the same objective, but unlikely the same high annual growth.Nucor’s competitors will be less risk-taking, giving Nucor a distinct advantage since a risk-aversive approach produces lower returns.

Current strategy

Nucor’s strategy is cost leadership. Even if there are changes in the competitive environment, this strategy is preferred since steel is a commodity-like product. While some mini-mill competitors follow a differentiation strategy, most follow a cost leadership strategy, though not very successfully.

 Assumptions

It is a general assumption for all competitors that cyclical fluctuations are

continuous.

Nucor’s competitors often looked like operating under a status quo while Nucor has grown to produce sheet-fed steel and stainless steel in its mini-mills, a seemingly impossible task.

Capabilities

Nucor’s strengths include highest productivity, lowest cost structure and a high profitability (30 years of continuous profits)13 in the industry and excellent labour-management relations. Nucor’s weakness, comparing to its competitors, is more exposure to short-term losses and temporary setbacks resulting from risk-taking.

The large integrated steel producers are comparatively strong in terms of size, established customer base and economies of scale. In terms of tonnage produced, Nucor ranked 8th globally with 20. 3 tons in 2006 (Appendix 1). Nucor could further strengthen its position as it is not far from the world’s 2nd largest steelmaker (Nippon Steel, Japan) of 34. 7 tons.

ROE wise (Appendix 2), Nucor is much stronger than its competitors with 29. 38 as compared to Commercial Metals Co’s 22. 63 and U. S Steel’s 17. 79.

ROA wise, Nucor is also much stronger than its competitors with 15. 6 as compared to 8. 33 and 7. 13. Nucor is more financially sound than its competitors with a current ratio of 2. 06 as compared to 1. 69 and 1. 59.

Strategic Analysis

Strategies 

Operational level

Nucor’s operational level strategy is core process re-engineering. This includes pre-heating the ladles allowing for faster flow of steel into the caster, continuous casters and a processes design that limit work-in-progress inventory, limit space and increase flexibility.

Business level

Nucor’s business level strategy is low cost leadership, keeping with its primary objective of the production of high volumes of quality, low-cost steel.

Competitive strategy

Nucor is the industry’s catalyst for technology innovation.

It pioneered and took lead of the mini-mill concept,

which later produce sheet steel and thin slab stainless steel. Also taking risk with a focus on long-term gains (versus short term risks).

Corporate level

To achieve its goal, Nucor diversify throughout the steel business. Nucor ventured into traditional bastions of integrated steelmakers (sheet steel, stainless steel), not constrained by the mini-mill format. Nucor has engaged in numerous upstream and downstream diversification.

Core Competencies

Core competencies are special capabilities that are critical to a business achieving competitive edge.

It is harmonizing of diverse production skills integrated with technological development.

Tangible resources

Nucor’s tangible resources include strong financial resources with a proven ability to generate internal funds and a track profitability record that gives it enormous borrowing power. Organizational resources appear slim without formal planning, coordinating or controlling systems.

Physical resources include 8 high-performing mini-mills strategically located to customer base and good access to raw materials with the company’s new iron carbide plant. Nucor has considerable technological resources, mainly involving process.

Intangible resources

Many innovative ideas come from its human resources. Human resources include knowledge of the business know-how, motivation to perform and strong worker-management trust and co-operation.

Capabilities

This includes the capability to produce high volumes of quality low-cost steel, innovative technology, continuous process refinement, continuous productivity improvement, motivated workforce, strong corporate culture. Employees are encouraged to take risk and a high tolerance for failure is given. Employees have a sense of ownership, exceedingly loyal and share a common goal of ensuring Nucor’s meets its primary objective. These give Nucor a competitive edge that is costly and difficult to imitate17.

And the costly duplication suggests that the resource or capability is inelastic in supply, earning the firm who possess it an economic rent.

Value chain analysis

Support Activities Firm Infrastructure

With

no formal planning or formal mission, possess a strong culture

Human Resource Management

• Not unionized, rewards risk-taking, high tolerance for failure, performance based bonus plans, encourage employee suggestions
• Technology Development continuous process refinement, continuous improvement, licensing/buying technology
• Procurement
• Upstream diversification, process innovation
• Primary Activities
• Inbound Logistics
• Operations
• Outbound Logistics
• Marketing & Sales

Service cost focused, coordinated with operational needs. Efficient, low cost, high productivity, meeting or exceeding quality requirements, continuous improvementafter-sale support 6.

Sustainable Competitive

Advantage Sustainable competitive advantage is derived from the trust-based working relationships along with a high tolerance for failure, would allow Nucor to take the risk needed to produce sustainable growth.

The source of this trust is in Nucor’s distinctive human resources strategy, which is characterized by informality, ad hoc planning, pay for performance, and employee empowerment.

Performance Appraisal

For the last five years, Nucor’s sales have increased over 240% from $4. 33 billion (2001) to $14.

75 billion (2006). Average sales price per ton has increased 88% from $354 (2001) to $667 (2006). Total tons sold to external customers have increased 81% from 12,237,000 tons (2001) to 22,118,000 tons (2006) (Appendix 3) (Figure 1).This rapid growth has been derived from acquisitions, optimizing existing operations and developing traditional greenfield projects using innovative technologies. Nucor achieved record sales and net earnings in 2006 for the 3rd consecutive year due to historically high selling prices, margins and shipments. Nucor was strengthened as North America’s most diversified steel producer.

With this diverse product line, Nucor’s short-term performance which is not dependant on any single market has been able to maintain profitability every year and every quarter since 1966. (Figure 2).

Figure 1: Nucor’s Average Sales Price Per Ton & Total Tons Sold
Figure

2: Nucor’s Diversified Product Mix 8.

SWOT Analysis

Strengths

Strong financial resources (profits, returns)
2. Industry leading low cost structure
3. Motivated workforce
4. Strong corporate culture
5. Innovation resources
6. Trust-based relationships
7. Technological expertise
8. Strong physical resources
9. Strategic management & leadership style

Weaknesses

• Vulnerable to losses and setbacks from risk-taking
• Lack of formal organizational systems may reduce efficiency
• High tolerance for failure risks potential loss
• Vague marketing structure or strategy

Opportunities

1. Expand into additional specialty products
2. Downstream diversification
3. Directly produce steel from iron carbide, eliminating the need for electric furnaces.
4. Growth and innovation through joint venture projects
5. Maintaining market leadership position
6. Exporting
7. Soaring global steel prices

Threats

1. Substitute products
2. Second mover mini-mill competitors
3. Integrated steelmaker competitors
4. Economic downturn
5. Sub-prime crisis in property industry
6. Globalization with consolidating competitors
7. Global oversupply (China slowed down by December 2004 and became net exporter)
8. A new technology called Finex (by Posco in South Korea)

Weaknesses and Threats

Nucor does not have serious weakness but only unused production capacity and a non-differentiated product. Serious threats from foreign competitors (e. g. Acelor Mittal) consolidating could affect Nucor’s growth. Such intense rivalry may also lead to price wars. Weaknesses and Opportunities- With soaring steel prices, expansion and vertical integration would give a better return.

Strengths and Threats

Expanding its product line could mitigate the threats from foreign and local competitors, given soaring steel prices will give better return. Consolidate with other steelmakers would make Nucor a bigger player globally. Using its market dominance, Nucor could negotiate with the government for better regulations against the foreign competitors. With its financial and leadership resources, Nucor should secure more backward integration into scrap steel market. Joint venture with Posco (South Korean steelmaker) to leverage new technology. Strengths and Opportunities-

Nucor has the financial, human and technological resources to penetrate new market, to expand product range, to compete in the stainless steel market and to joint with Japan to open new market in the Asian region.

Strategy Formulation & Implementation

Nucor’s current strategy is working. Its unique corporate culture and distinctive human resources strategy which produced a non-substitutable trust-based relationship, give Nucor a sustainable competitive advantage, contrasting the antagonistic relations in the steel industry. This trust enables Nucor to take risk which facilitates its growth. As an engineer from a major integrated mill said upon visiting a Nucor plant, that Nucor’s culture were such that everyone work hard and help each other, collectively survive and meet with success.But theirs is one of aggression, confrontation and lack of trust.

New Initiatives to Sustain Growth

Nucor should further leverage its sustainable competitive advantage by expanding more aggressively, taking the following steps:

1. To build an additional iron carbide plant to increase the availability of low-cost raw materials.
2. To carry out market research to ascertain

• Expand product line and downstream steel business (e. g. steel for building, bridges, highways, roof decking, flooring);
• Export market;
• Competitors’ current strategies, weaknesses and strengths;
• Joint venture partners and projects ) Expand domestic markets f) Backward integration (e. g. scrap brokerages)

3. To develop strategic marketing program 4. Add an employee stock ownership program to further reinforce employees’ sense of ownership and loyalty.

References

1. http://www. bizjournals. com/charlotte/stories/2008/04/21/daily34. html 2.
2. http://www. anbhf. org/laureates/keniversen. htm 3. Johnson, G. & Scholes, K. (2005)
3. Exploring Corporate Strategy: Text and Cases, Prentice Hall, London 4. http://en. wikipedia. org/wiki/U. S._Steel_Recognition_Strike_of_1901 5. John H. Sheridan, 1996 “New Era – Or Breather? Industry Week, 5 February, pp
   

49 6. Brian K.

December, pp 36-47 15. http://www. usatoday. com/money/autos/2004-10-13-steel-prices_x.

million metric tons (mmt) Total world steel output in 2006: 1,239. 5 million metric tons (mmt)