A Situation Analysis For Nucor Corpoation Economics Essay

“Nucor Corporation is made up of 17,300 teammates whose goal is to “Take Care of Our Customers.” We are accomplishing this by being the safest, highest quality, lowest cost, most productive and most profitable steel and steel products company in the world. We are committed to doing this while being cultural and environmental stewards in our communities where we live and work. We are succeeding by working together”

“About us.” Nucor Homepage. 2008. Nucor Corp. <http://www.nucor.com/indexinner.aspx?finpage=aboutus>.

Nucor steel is a leading steel company headquartered in Charlotte, North Carolina. They are an innovative and lean company. They benefit from each manager operating their segment as its own business entity. The excellent relationship has allowed management to achieve success through financial goals and has given employees job security and a great working environment. Although the company has seen it’s rough times over the past 100 years, it certainly seem to come through strong for many after mergers and acquisitions set in during the early 2000’s. Nucor has also pioneered the mini-mill steel which led to reduction in cost, energy use, and pollution. Environmentally speaking Nucor is industry best and largest recycler of any material in America.

Nucor’s analysis will primarily focus on management’s ability to allocate resources while cutting costs and competing in international markets. The industry itself does not allow for product differentiation or immense technological advances, therefore companies are forced to offer the lowest prices in order to remain competitive.

II. DIMENSION OF CORPORATE STRATEGY

Nucor chose to enhance the scope of the company for corporate performance reasons. In order to gain higher degree of control, Nucor established a functional diversification which concerns an expansion of backwards range activities towards supplier (vertical integration) and acts directly as distributor. The breadth of scope along functional dimension was followed by narrow scope along geographic dimension which can be seen from its geographic concentration solely in United States. Since Nucor’s business-units have the same basic resource; steel, it has high level of relatedness.

Nucor has architectural, allocating, administrating, and assisting role. In architectural role, Nucor is responsible for the strategy (scope decision, defining growth paths, and goals for the corporation as a whole and the configuration of the company), corporate value creation (capitalizing opportunities, exploiting synergies, and assessing parenting fit), and accumulation of assets for the corporation. Nucor business units act as dealers for other businesses (supplier role). It delivers large portion of its output in the form of end products internally. As a vertical integrated firm, Nucor’s business units take this role largely.

The governance characteristics of the corporations allowed the business units to respond to competitive demands of a specific business area quickly. Nucor, as a diversified firm was able to reap the benefits of ‘governance economies’ in case market demands changed. As a diversified company, Nucor has the ability to exploit ‘economies of scope’ in steel industry. Nucor choice to linking up sequential activities enables firms to reduce overall operating cost in one or more of its SBU, as well as driving profit by corporate value creation.

SITUATION ANALYSIS

III. 1. External Environment

In every country, tax policies are unavoidable. Nucor deals with taxes in United States such as states, federal, and local taxes. Even though taxes heavily affect their bottom line, they do not always negatively affect a business, especially when those taxes are meant to protect local company. In international perspective, Nucor also deals with international trade law. Markets are attractive when currency is weak. This was the case for the steel industry during the economic downturn in 2001. Imports soared to record highs, while exports were very low.

Nucor targets small rural towns in order to have a very loyal community base. It avoids building in major cities to maintain relationships more directly with its community. Nucor faces problems with the increasing age of baby-boomers because it led to a nationwide decrease in blue-collar workers. Technology has major impact to steel industry. While some steel industries outsource their production due to high pace of technology, Nucor took the opposite approach. Nucor was the first to pioneer mini-mill technology of small factory production of a specific product and eventually increase its capacity utilization.

III. 2. Internal Analysis

Nucor’s primary inbound logistics are scrap metal and electricity. Nucor has established a raw materials strategy to control directly and indirectly through joint ventures with various partners. Their first material control occurred in 1968 when they decided to move to steel business to provide raw material for Vulcraft. In August 2005, Vulcraft Structural Products, Vulcraft Decking, Nucor Building Systems Products, NUCON Light Gauge Framing, and Nucor Fastener Products were being supplied by groups of Nucor Bar, Beam, Plate, and Sheet Mills. The groups of Mills used scrap steels until 99% from both post-consumer (17%) and post-industrial recycled content (83%). Post-industrial scrap steel acquired through joint-ventures. Nucor’s battle with energy prices was solved by using mini-mill technology.

Technological advances have played a key role in the superiority of Nucor’s production processes. As outlined previously, strip casting technology and continuous casting within the mini-mill framework have unequivocally been a key to the success of their operations. Nucor also has been an industry leader in reducing its work-in-progress inventories and reducing the storage and warehousing needs by utilizing a demand-pull approach to their production material needs rather than a supply-push strategy. Because Nucor has wide array of products, production processes in Nucor had been decentralized and considered excellent since they had implemented innovative technology which is supported by lean management, empowered employees, and strong control over raw materials.

In the steel industry, product differentiation is hardly noticeable so companies in this industry must compete in cost and delivery service. Nucor’s plants were built near the customers so that it could guarantee the lowest possible cost for steel purchases and Nucor does have significant distribution channels in the US with its 14 different steel plants which allow wide market coverage. But with a globalization challenge, this kind of distribution approach will create a problem since Nucor do not have any steel plants outside US.

Nucor’s marketing strategy involving environmental friendliness, worker safety, and its contribution to the community. Nucor associated themselves with environmental friendliness through its recycled content and their mini-mill technology which reduce pollutions made by steel making process. Nucor pronounced its concern about worker’s safety since high death rate could deteriorate employee’s moral and feel of safety. The wave of co-locating companies near Nucor’s plants has added another one or two hundred jobs for people in the community.

Since Nucor has broke traditional way of equalizing freight, domestic markets relocate around Nucor’s plants in order to receive substantial cost reductions and use JIT. From international approach, Nucor does not give many services.

Since the divisions did their own manufacturing, selling, accounting, engineering, and personal management, corporate staff only consisted of less than forty-five people. The offices were simple, routine, and business-like. To be successful with integration, corporate managers required new functional skills to expand their knowledge structures to address new complementary perspectives since there are unique functional capabilities specific to each stage in the industry chain. Nucor has worked through a difficult time in the industry to become the world’s 10th-largest steelmaker and the biggest steelmaker in the US. Their key success is their excellency in managing knowledge and people. Nucor philosophy of self-empowerment has encouraged them to hire people that want to make decisions on their own, responsible for what they do, and have an attitude of pride and excitement in their accomplishment.

III. 3. Industry Analysis (Appendix-1)

In a market that has low product differentiation, in which customers demand the lowest possible price, fierce rivalry ensues because of the price competition. Nucor was the dominant player in the US economy, but fierce price competition from abroad increased competition among firms. The biggest threat is added production of cheap foreign steel. New entry into the US market is not likely because of the enormous capital expenditures required and because of the unfavorable labor conditions. Price increases in scrap steel which was caused by increased demand domestically and abroad have added pressure on Nucor in keeping their supply costs low. Because the majority of Nucor’s sales are on a bid framework, buyers have tremendous bargaining power. Unlike the other sections of the model so far, the threat of substitutes is relatively low. Essentially, no other metal can offer equal benefits per cost that steel currently can. Aluminum is probably the biggest substitute product to steel for most applications but it is not as strong as steel.

III. 4. Financial Analysis (Appendix-2)

The year 2005 is a good year for Nucor. Their net income rose significantly but their liabilities continue to grow in a stable rate. Nucor revenue was above average even though still under the United States Steel Corp. Nucor has the biggest number of ROE and market capitalization among its rivals. After February 2005, Nucor’s stock price jumped dramatically.

SWOT ANALYSIS (Appendix-3)

Nucor’s key strengths are its corporate philosophy, cost control, and innovative leadership. One of Nucor’s key strategic strengths is its philosophy of empowering its workers and reducing the inefficient bureaucracy that plagues corporate America. Another one of Nucor’s key strengths is its focus on cost control. To be competitive in a market with little product differentiation, price is the main competitive factor. One of Nucor’s core competencies is that its expertise in keeping costs low.

Dependency on scrap steel and energy prices and the inherent volatility in these markets pose to be the biggest weaknesses of Nucor. Huge capital requirements for expansion and technological modernization are another weakness of Nucor.

As the US, steel economy continues to be beat down by cheap foreign steel, many companies that have continued to thrive, namely Nucor, have tremendous opportunities to capitalize on. As many US steel manufacturing companies fall into bankruptcy, Nucor can acquire them, increase production capacity, and increase their economies of scale. Another opportunity is more product diversification to reduce volatility in product markets.

The biggest threat the firm will encounter going forward is unequivocally the erosion of their market share and profitability resulting from growing imports of cheaper foreign steel. Another threat that looms in the steel industry is the heavy correlation between economic growth and the demand for steel.

STRATEGY FORMULATION

Nucor faces a problem with excess capacity of steel production on a global scale. The high capacity has created a price war for steel, as well as steel dumping into the U.S. market which has diminished profit over the last couple of decades. Another problem they face is lack of innovation of technology. In order for Nucor to maintain, and continue to post profits, in the future they must identify areas to increase technology to lower production costs and increase throughput.

Strategy Alternatives

Nucor’ strategy alternatives are:

Stay domestic and maintain its technological advances and cost reductions

Works internationally

Strategy Choice and Evaluation

Based on several factors, our team suggests that Nucor works globally rather than stay domestic and maintain its technological advances and cost reductions.

b.1. Justifications for Not Staying Domestic

Steel market in US has cyclical characteristic, it is mature, and overflowed by excess capacity. Technological advances cannot be done in short time and it involves enormous investments. Excess capacity in steel industry creates price war between living entities inside the industry. Even though Nucor has good technology, power over raw materials, and exciting marketing pitch, the pressure from foreign company who can provides cheaper steels has made Nucor’s technology seemed obsolete.

The decreasing number of baby-boomers workforce also hurts Nucor. Jobs in steel plants are considered uninteresting for the young generation and labor wages in US are high compared with China and Korea. Exporting steels from US to another country might result on high cost and risky distribution since Nucor does not have any plants outside US.

b.2. Justifications for Working Internationally

The risk which arises because of US market cyclical characteristics can be overcome by spreading the risk into larger market base and the excessive capacity can be allocated to several different countries. The price war in a global market is not as stiff as in local market. Nucor has the choice to outsource the research and development of the technology to its partner.

Nucor’s marketing pitch such as environmentally friendly, workers safety, and its unique incentive pay might attract both consumers and workforces outside US. Each plants in several different country will enable Nucor to serve consumers in a better way.

STRATEGY IMPLEMENTATION

Nucor needs to find cheaper global suppliers and make joint-ventures with them to ensure the availability of raw materials which will be included in supplier’s balance sheet rather than Nucor’s balance sheet. It will help Nucor to maintain low inventory.

Analyze steelmaker companies outside US and initiate a plan to acquire or build joint-ventures. The top managers must accurately assess the cost and benefit of each possible acquisition which will involve considerations of transaction cost and knowledge transfer. Corporate managers must determine how to direct and operate their firm beyond its original boundaries. Using the knowledge of acquired-firm managers who have different organizational and industry experiences might be challenging and difficult for corporate managers, but it will broaden corporate knowledge about running business outside US.

Nucor must pay attention to the latest technology which will be useful in steel industry and be prepared to take the risk by implementing that technology. Make the entire value chain from raw material control until distribution process as the center of gravity.

CONCLUSION

Overall, the steel industry is a very tough industry to compete in and be successful. It is vital that Nucor is in a position to acquire other companies and form joint ventures. Nucor currently has done a remarkable job moving itself to an industry leader. Their proven organizational style, management, employees, and active pursuit of growth have allowed them to emerge as a global industry leader. However, that is not to say there will not be more major challenges for Nucor. Nucor is currently faced with increasing competition from both domestic and international rivalries. It is critical that Nucor continues to grow and increase global market share. Current management must continue to specialize in Nucor’s core product and capitalize on a proven successful organizational structure.