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Nucor at a Crossroads Essay

With roots dating back to 1904 in the automobile manufacturing industry, Nucor’s business strategy has morphed many times over the course of the past century in response to struggling sales and unrealized business strategies. Since F. Kenneth Iverson’s appointment as Nucor’s President in 1965, however, Nucor has performed very well. With a focus on efficiency, Nucor is committed to minimizing bureaucracy and maximizing performance and productivity via the utilization of an open-door/continuous improvement/ entrepreneurial culture, a compensation scheme premised on performance-based incentives, and — last, but not least —commitment to technological advancement.

With this approach, in an industry with 36 different companies, Nucor enjoyed the second largest market share in 1986, with 16 plants and an annual production capacity of 2.1 million tons of steel. In 1985, Nucor was ranked the most productive steel-maker in the United States and the second most productive in the world, averaging 981 tons per employee, per year. Nucor managed to achieve this success using a low-cost strategy, which proved to be particularly suitable in the highly competitive, commodity-like steel industry.

Despite its positive performance, competition in the U.S. steel industry was keen in 1986. At that time, the industry had sustained seven straights years of decreasing domestic demand, falling 22 percent since 1979 — but still demanding 90 million tons annually. Mini-mills accounted for 16 percent of domestic steel capacity, up from seven percent in 1975. Meanwhile, integrated steel-makers, although a major competitive force, were plagued by the complexity of their steel-making process as displayed in Exhibit 3 of the case, their own failure to invest in new technology, price-competition from imported steel, and turbulent labor relations.

Still, they maintained about half of the flat-rolling capacity — a necessity for the flat sheet segment. Moreover, with respect to technology, inasmuch as integrated steel-makers might have wanted to follow the lead of their mini-mill counterparts, the mini-mills could not be easily imitated due to their utilization of electric arc furnaces and scrap in steel-making, which integrated steel-makers could not use following their eventual switch from open hearth furnaces to oxygen furnaces.

While mini-mills had been shut out of the flat-rolled and specialty products segments, they controlled the market for low-end bars, wire rods, and small structural shapes. Internationally, Nucor faced threats for high quality steel imports from Canada and Japan, as well as cheap low-end steel from newly industrializing nations. The Five Forces Model applied as follows to Nucor’s business as of 1986:

Supplier Power — Supplier power was low insofar as Nucor’s mini-mills were more energy efficiency than their integrated counterparts and their production was fueled by scrap metal, which was more readily available vis-à-vis iron ore. Moreover, by using David Joseph, Inc. as its purchasing agent for scrap metal, Nucor avoided situations where it would have to haggle over prices with scrap suppliers. Suppliers of transportation services also had little power, with Nucor making a practice of building plants in the vicinity of at least two railroads (leaving over-the-road transporters with almost no bargaining power).

Buyer Power — With Nucor’s largest customers fairly concentrated (i.e., service centers and distributors, the automotive sector, construction contractors, and the appliance and equipment industries), and with the relative lack of product differentiation between steel-makers (a commodity market in many respects), buyer power in Nucor’s business was high. This was particular true given buyers’ price sensitivity, which could easily push them to buy other substitute materials as noted below (although the switching costs associated with doing so would presumably discourage that to some extent).

Threat of Substitutes — The threat of substitutes facing Nucor was moderate. On one hand, although demand for steel had declined in recent years as noted above, it was not predicted to decline further as of 1986. On the other hand, with the advent of materials such as aluminum, plastic, and composite materials, especially in automobile industry, the threat of substitutes in the market was on the rise.

New Entrants — Notwithstanding that 36 companies were competing in the mini-mill industry, much of the market was controlled by the top five, the second of which was Nucor. With competition levels high in this industry and with costly barriers to entry (i.e., building a steel plant), the prospect of new entrants facing Nucor was relatively low. Degree of Rivalry — The degree of rivalry facing Nucor was high, not only in light of domestic competition, but particularly due to vigorous price-competition from abroad, and —as a general proposition — the relative lack of differentiation in the product itself.

The key to Nucor’s relative prosperity in this industry was its competitive advantages over integrated steelmakers and other mini-mills: Technology — Nucor had a practice of constantly upgrading its facilities. Since the early 1970s, Nucor built or rebuilt at least one steelmaking or fabrication facility each year. This ensured that it was using the most current technological improvements, which thereby helped reduce its costs and, ultimately, its pricing.

Relatedly, as committed to technology as Nucor was, it had no R&D budget; rather, it regarded capital equipment suppliers as its R&D labs and treated the costs associated with starting-up new plants and equipment as R&D investments. Cost Versus Willingness to Pay — Buyers’ primary motivation (i.e., willingness) to pay for steel from Nucor was not Nucor’s pricing, but quantity. In particular, Nucor’s system enabled buyers to order just what they needed, placing more overall orders all-the-while maintaining lower inventories. In this way, Nucor charged market prices, and did not give bulk-purchase discounts.

Nonetheless, the frequent-order/low-inventory approach was a big draw for companies practicing just-in-time inventory because it helped those companies avoid tying up capital in large standing inventories. While buying in bulk might have resulted in modest discounts from Nucor’s competitors, the flexibility that could be achieved by buying from Nucor was a much better deal overall. Lean Management Structure — Fueled by Iverson’s philosophy of decentralized management and the notion that “the fewer you have,” the more effective your communication and decision-making, Nucor had only five layers of management compared to more than 12 at the integrated companies.

This reduced costs and enhanced efficiency. Additionally, Iverson believed in delegating authority to the lowest level possible. This meant that low level employees were able to make decisions and innovate with minimal bureaucratic obstacles. Building Plants — Instead of relying on turnkey contractors to build its plants, Nucor acted as its own construction manager.

Dealing directly with independent contractors allowed Nucor to build plants relatively quickly and with more economical fixed-price contracts. As compared to its competitors, Nucor was usually able to start-up a new plant within 18 months of ground-breaking, thus enabling it to recoup its investment more quickly than the competition. Performance-Based Compensation /Motivation — As noted in the case, “Nucor’s top managers believed that ‘the best motivation is green.’” A such, Nucor was renowned for tying pay to performance.

For managers and production workers alike, base pay started well below industry averages (including for Iverson himself), but all employees stood to earn substantially more than they could anywhere else, with bonuses averaging 80-150 percent of base pay. To this end, all Nucor employees were made acutely aware of various performance metrics on a daily basis. At the entrance of each plant, for example, giant boards were posted with Nucor’s current return-on-assets, return-on-equity, and latest stock price. Feedback on performance was virtually immediate as well, with bonus checks issued on a weekly basis.

Employee Loyalty — With an employee turnover rate that was a mere fraction of other companies in the industry, Nucor instilled loyalty in its workforce. It did this via various mechanisms, ranging from generous fringe benefits and perks to taking extraordinary efforts to avoid layoffs even during economic downturns. Nucor also adhered to a collectivist approach to dealing with challenges through its “Share the Pain” program, pursuant to which even Iverson’s compensation was cut by more than half during a particularly slow performance period between 1981 and 1982.

Employee Equality and Entrepreneurial Management — Nucor was committed to treating all employees equally to prevent the formation of rivalries between management and the general workforce. Indeed, all employees were considered equally important members of the team. The following remark by Iverson was the most demonstrative of this point: “‘Good managers make bad decisions.’ We believe that if you take an average person and put him in a management position, he’ll make 50 percent good decisions and 50 percent bad decisions.

A good manager makes 60 percent good decisions. That means 40 percent of those decisions could have been better. We continually tell our employees that it is their responsibility to the Company to let the managers know when they make those 40 percent decisions that could have been better. … The only other point I’d like to make about decision-making is, don’t keep making the same bad decisions.” Nucor’s Strategy: A Hard Act to Follow — Even though Nucor allowed competitors to visit its plants (as long as the favor was returned), no other company was able to imitate its success. The keys to Nucor’s success were, as already detailed above, its team-oriented, all-in approach to the business. More than a mere mission statement, this approach was the cultural lifeblood of Nucor and, due to Iverson’s commitment and leadership, this philosophy permeated the workforce in a way that simply could not be replicated by competitors with very different cultures.

For example, Nucor’s “Share the Pain” program, while easy to have during good economic times, became much more than a catch phrase when Iverson took a substantial pay-cut himself when times were tough. By contrast, the CEO salaries at the integrated companies did not fall nearly as much as Iverson’s did when their companies were struggling. This distinction was a defining characteristic for Nucor, and one that made its strategy virtually impossible to imitate. The bottom line is that Iverson not only made rules, he strictly followed them himself and thereby reinforced a highly disciplined, accountable, and thus productive workforce.

It was these advantages that allowed Nucor, from 1975-1987, to have an average return-on-assets of 10.06 percent, whereas the average in the mini-mill industry was 7.32 percent and the average for integrated companies was -1.24 percent.1 This comparison is a good indicator of Nucor’s past performance, particularly with its return-on-assets almost 40 percent higher than the mini-mill average.

Nucor in the Thin-Slab Casting Business: A New Landscape, With New Competitive Advantages

Despite its solid performance in the mini-mill industry, in order to expand into the thin-slab casting business, Nucor realized that it would have to invest in compact strip production or “CSP,” which SMS of West Germany was actively marketing to steel-makers around the world. Indeed, this was a primary risk facing Nucor’s potential entry into this business — that it “might gain only a two-to-three year head start by being the first adopter if others decided to be fast followers.” The prospect of “technological leapfrogging” was another risk — that is, as soon as Nucor invested in a new thin-slab plant, there was a chance that other cheaper, and more technologically advanced methods of thin-slab casting would be introduced. Yet another risk was that if other mini-mill companies followed Nucor into the thin-slab casting business, the demand for scrap metal would likely rise, with a corresponding rise in its price.

It should be noted, however, that this risk was offset to some extent by Nucor’s utilization of David Joseph, Inc. as its intermediary for procuring scrap metal. The complexity of a thin-slab plant versus mini-mill plants would also pose potential operational risks. Financially, entering the thin-slab business would also be a stretch for Nucor, with only $185 million in cash and short-term securities (as compared to the cumulative $410 million that it would incur in capital expenditures in the first three years of its investment due to its preexisting joint venture with Yamato Kogyo). These, and other “unknown unknowns” rendered this business opportunity a significant gamble for Nucor.

Nucor’s competitors in the thin-slab casting business would include the integrated steel giants that already had a presence in the flat sheet market, such as U.S. Steel, LTV Steel, and Bethlehem Steel. In addition, other aggressive mini-mills would likely follow Nucor into the market at the first sign of profitability. Chaparral Steel was an especially probable competitor, with its “reputation for progressiveness that was exceeded, perhaps, only by Nucor’s.” North Star, due to its sheer size, would also be a likely competitor from the mini-mill market. Finally, foreign steel-makers would remain an ever-present competitor in this market as well. In 1986, imports already comprised roughly 18 percent of the flat sheet market. With their low labor costs and increasing steel quality, these foreign companies would be well positioned to challenge Nucor’s profitability for many years to come (barring governmental intervention via trade restrictions, etc.).

Despite the noted risks and competitors awaiting Nucor in the thin-slab casting business, the prospects for profitability were good. First and foremost, the flat sheet segment still represented half of the U.S. steel market. Second, as captured in Exhibits 12A and 12B of the case, the construction costs of a thin-slab plant versus a modernized integrated plant was $450 million and $1,873 million, respectively.

Moreover, once built, the thin-slab plants operated more efficiently than their integrated counterparts — and therein was Nucor’s core promise of profitability in the thin-slab casting business. Whereas integrated steel-makers in the flat sheet segment took four to five labor hours per ton to produce sheet steel, it was estimated that the same production could be achieved in a thin-slab plant with only forty-five labor minutes per ton, providing Nucor with an estimated $50 – $75 cost advantage per ton, a 25 percent profitability edge on its competitors.2

With respect to its competitive advantages in the thin-slab casting business, Nucor has always quickly adopted new technology to enhance its position in the marketplace. Indeed, one of its key competitive advantages has been its unconventionally simple method for evaluating investment opportunities: will it perform technically as advertised and do previous capital expenditures constrain Nucor’s full commitment to the project in question?

But prior to this investment opportunity, perhaps none have required such an enormous amount of capital and degree of risk. Furthermore, even if Nucor was able to achieve a first-mover advantage, that advantage was likely to be short-lived, first, due to the likelihood that others would follow in Nucor’s footsteps (particularly with SMS actively marketing its technology to more than 100 other steel-makers worldwide) and, second, due to the probability that the compact strip production method would soon be surpassed by increasingly productive technology and imitations from other competitors.

As of 1986, SMS’s competitor, Mannesman-Demag, was already working on and promoting a new method that could potentially accomplish this. While the potential of new technology should always be considered, it should not paralyze the decision-making process for Nucor. By definition, where success is achieved by one, imitation is attempted by many others. Again, likely imitators in this case would be Chaparral Steel and North Star, especially in light of North Star’s history of entering nonstandard markets for mini-mills, such as seamless pipes.

To counterbalance this reality, Nucor must simply continue to utilize every new investment that it makes in new technology as a catalyst for further innovation, perhaps evolving its thin-slab casting plant to manufacture not only ordinary steel, but stainless steel and other high-demand steel products in the future. Indeed, operating on the cutting edge has always been a key competitive advantage for Nucor and, as long as it stays on that point, that should remain a powerful competitive advantage for years to come.

Moreover, with respect to the question of whether this business is viable, it is clearly viable in the short-term in light of its substantial profitability potential and, even in the long-term, it will be an important step toward the future in the event that Nucor adopts it. Thus, while the advantage might only last a few years, not investing in the thin-slab plant would be a significant opportunity missed. Even if the CSP technology is leap-frogged by other developments or copied by imitators, all indications are that the thin-slab casting plant is Nucor’s gateway to the flat sheet segment and, since that represents half of the U.S. steel market, it is a long-term business prospect for Nucor, regardless of the risks.

Recommendation for Nucor: Build the Thin-Slab Casting Plant

Based on all of the aforementioned competitive considerations, Nucor should accept the risks associated with investing in CSP technology and build a thin-slab casting plant. Using Nucor’s unique investing criteria — that “plants were supposed to achieve a 25 percent return-on-assets within five years of start-up” and that “projections about them were compared, whenever possible, to historical data on other plants” — the applicable financial analysis supporting this recommendation is set forth below: RETURN-ON-ASSET FORECAST — OPERATION YEAR 1


While there is insufficient data provided in the case to provide a more precise outlook than this, it is worth noting that further approximations could be calculated based on assumptions concerning any debt incurred in connection with a new thin-slab plant, the interest rate paid on such debt, and tax rates, all of which could decrease the return-on-assets and cash flows. Conversely, as the start-up costs that would be incurred in the first year would not be owed in ensuing years, both cash flow and the return-on-assets could be expected to rise.

Likewise, it stands to reason that after the initial start-up year, the plant would operate with increased efficiency and production levels and likely with reduced costs as well, which would tend to drive the return-on-assets (and overall cash flows) even higher. In any event, looking at this potential investment based on the financial criteria utilized by Nucor, it is clear that it would attain Nucor’s 25 percent return-on-asset target within the first five years of the plant’s start-up, with a probable increase thereafter.

Risks that could potentially affect Nucor’s profits, other than those already discussed above, would include a number of factors outside of its control, such as fluctuations in tax and interest rates. Perhaps most importantly, increases in the price of scrap metal could potentially have a significant adverse impact on Nucor’s profits, as would a decline in demand (and, thus, a drop in prices) in the flat sheet segment.

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