Essay, Pages 8 (1938 words)
Nucor Corporation 2008-2009 is a strategic management case appropriate for first-year MBAs or seniors in an undergraduate capstone course. The focus of this case is the strategy of the most successful steel-maker in the United States as of 2008/2009. It has a difficulty level of five.
Secondary issues include Porter’s Five-Forces Framework of industry analysis and the effects of the global economic slowdown in the last quarter of 2008 and the first quarter of 2009 on Nucor’s business. The case is designed to be taught in a single 75-minute class and is expected to require two to three hours of outside preparation by students.
In order to facilitate students’ understanding of the economics of accounting figures, we have rearranged the balance sheet so that “earning assets” equal “permanent funding sources.” For real wealth to be created, the average return on earning assets must equal or exceed the weighted average cost of capital demanded by permanent funding sources.
Nucor has been the most successful American steel maker for more than 35 years.
It has a unique company culture and is recognized as the technology leader in its field. In an industry that is heavily unionized, Nucor’s work force is non-union. The company is also a textbook example of Porter’s Cost Leadership generic competitive strategy. By the end of 2007 the company had 20 plants in its steel mill segment, 32 in the steel products segment, and one reduced iron ore plant in Trinidad.
The organizational structure is flat and decentralized with only four levels of management.
Despite its long track record of growth and financial success, Nucor’s business sank like a stone in the fourth quarter of 2008
Nucor’s history falls into three eras (Preston, 1992). The first was the Reo Era and it began in 1897 when Ransom E. Olds founded the Olds Motor Vehicle Company which was later sold to General Motors. In 1905 Olds launched the Reo Motor Car Company in Lansing, Michigan. This company filed for bankruptcy in 1938 and was reorganized to focus on building trucks during WW II and lawn mowers in the post-war era.
The firm was sold at a $ 3miilion loss to Bohn Aluminum and Brass Company and was left with no viable businesses primarily because of the intense completion in the lawn mower industry. The second period in Nucor’s history was the Nuclear Corporation Era. In 1955 a group of dissident share-holders opposed the Nucor board’s decision to liquidate the company. Instead, they forced it to acquire a tiny nuclear services company called Nuclear Consultants, Inc.
The original Reo Motor Company was renamed the Nuclear Corporation of America, Inc. It’s and the headquarters were moved to the Empire State Building in New York City. During the 1950s and ‘60s the Nuclear Corporation of America began acquiring unrelated businesses including Vulcraft – a manufacturer of steel joists located in Florence, South Carolina. F. Kenneth Iverson was hired as General Manger of Vulcraft in 1956. In 1965 Nucor began its third era with the promotion of Ken Iverson to president and Sam Siegel to chief financial officer.
Iverson and Siegel sold off or liquidated all Nuclear businesses except Vulcraft and moved company headquarters to Charlotte, North Carolina – slightly over 100 miles from the Vulcraft plant in Florence. Vulcraft bought steel bars and angles from United States Steel Corporation and a number of foreign suppliers. Eventually the price of raw material for steel joist went up to 75% of the selling price of the joists. Faced with the prospect of further escalation in the price of this key raw material, Iverson decided that Nucor should integrate backwards and begin producing its own raw material.
In 1969 Nucor opened its first mini-mill in Darlington, South Carolina to supply its own steel. Until then, the mini-mill concept was used in Europe but not in the United States. In a mini- mill, steel scrap is melted in electric arc furnace and poured into a continuous caster, generating finished bars.
and angles without the soaking pit and rolling mill steps in a traditional steel-making. The savings in capital investment are significant- $200 – $300 per annual ton of capacity. The saving in operating costs is also substantial because far less energy and labor are required for each ton of steel produced. Over the next two decades, Nucor opened additional joist plants in Indiana and Utah. It also built new min-mills in Texas, Nebraska and Utah.
Nucor’s profits soared. By the early 1980s it was one of the most profitable carbon steel operations in the world (Brockerman, 2006). In 1983, Nucor built a new plant at Crawfordsville, Indiana to produce 2-inch thick slabs. This was a technology “first” and that put Nucor in direct competition with the large integrated steel companies serving the automobile and appliance industries.
At the end of 1986, Nucor had 16 steelmaking and fabrication plants at 10 locations around the United States (Ghemawat & Stander, 1998). Starting in the 1990s, Nucor acquired and built additional mills and steel product manufacturing firms to serve such industries as bolts and steel buildings. Don DiMicco was promoted to CEO in September 2000 and Ken Iverson retired. Trained as a metallurgist, DiMicco joined Nucor in 1982 from Republic Steel.
In 2007 Nucor produced 22.1 tons of steel and steel products with revenues of over $16 billion and net income of $1.4 billion (Nucor, 2007). Despite the sharp downturn in the fourth quarter of 2008, it too was a “banner” year. Sales rose to $24 billion with net income of $1.8 billion (Nucor, 2008). This increase in revenue was primarily attributable to the acquisition of the David J. Joseph Company and the joint venture with Duferco, S.A. By the end of 2008, Nucor had 53 facilities in the United States and one in Point Lisas, Trinidad which produced pelletized iron raw material. They also had joint ventures in Brazil and Australia for the production of pig iron.
NUCOR AS AN ENTREPRENURIAL ORGANIZATION
In this age of bankruptcy filings by GM, Chrysler and other Fortune 500 firms it might sound odd to describe a major steel firm as an entrepreneurial organization, yet that is exactly what Nucor has been throughout its history. In 1969, facing high costs for raw material (flats and bar size angles), it integrated backwards along its value chain to produce these products “in house.” This was not a minor decision. Nucor found it necessary to use a mini-mill approach to steel making: this was a departure from traditional steel making processes employed by the major steel producers at that time.
The mini-mill process begins by melting steel scrap in an electric arc furnace and pouring molten steel into a continuous caster to create finished shape angles and bars. The continuous casting apparatus that Nucor employed was not even available in the United States and had to be purchased in Germany. This was a process innovation that reduced the cost of raw material substantially. By the 1970s, Nucor had four mini-mills in the United States producing all of its own raw material with sufficient capacity to sell to others. This was a successful product-market innovation that put Nucor in direct competition with all the major producers.
They were successful because their costs and selling prices were below their competitors. Today Nucor sells 90% of their steel output to other firms. In addition to technology innovation, one of the most important components of Nucor’s success has been its culture. A central feature of Nucor’s culture is its emphasis for over 30 years on continual technology leadership. In the 1980s its second major technology innovation was the thin slab caster that was built at its plant in Crawfordsville, Indiana (Preston, 1991). This process produces “thin slabs” that can be immediately rolled into sheet steel for the appliance and automotive industries.
It eliminates the huge front- end investment in blast furnaces, open hearth furnaces and associated intermediate heating furnaces prior to finished rolling. As a result, the capital cost per annual ton is $200-$300 lower than conventional steel mills. Despite the common perception that original innovations are more likely to occur in small organizations (Carland & Carland, 1996), Nucor’s experiences tend to refute that. Nucor exhibits periodic and discontinuous entrepreneurial intensity (Morris, Lewis & Sexton, 1994).
Continual experimentation is strongly encouraged throughout the organization and as Ken Iverson notes. “This approach leads to more than a few failures. Every Nucor plant has its little storehouse of equipment that was bought, tried and discarded” (Iverson, 1998). This willingness to experiment and to share the results of both successes and failures is what makes Nucor a “boundary less organization” (Welch & Welch, 2005).
Nucor has five major characteristics – egalitarian behavior, pay for performance, flat organizational structure, continual experimentation in the area of technology and non-union status. At Nucor egalitarianism is emphasized in a number of ways. Except for maintenance personnel (who must be identified quickly in case of a breakdown), the hard hats of all employees are the same color. There are no designated parking places for executives and managers.
There are no executive dining rooms and everyone in the organization flies coach. The result of these egalitarian traits is the replacement of the old-fashioned “Command and Control” environment with enhancement of bi-directional communications. Throughout his long tenure leading Nucor, Ken Iverson answered his own phone. All employees were encouraged to call him if they had a problem that had not been resolved in traditional ways.
Pay for performance has characterized Nucor’s compensation programs since the early 70s. Hourly workers are divided into groups of 20-30 persons with related jobs. Their performance is compared to standards each week. Work groups that achieve productivity above standard are paid weekly bonuses that can go as high as 150% of base pay. Hourly workers at Nucor commonly earn $5,000 to $10,000 per year more than their peers at traditional unionized steel mills (Rumelt, 2003). This logic extends throughout the entire organization; managers and executives earn incentive compensation based primarily on return on equity.
During slow periods – the steel industry is notoriously cyclical – hours for mill employees are reduced to avoid layoffs. As a result, workers can depend on having a job, even in bad times. Coupled with pay for performance, Nucor has generous fringe benefits including an employee stock ownership program and college tuition plan for dependents of all employees. All employees have the same health care and vacation plans. One example of the attractiveness of the compensation/benefits package at Nucor is the experience of the Darlington, South Carolina plant in 1985.
The company ran an ad for additional workers on a Friday and on Saturday morning applicants began lining up outside the plant to interview. The line of applicants stretched around the plant and began to disrupt traffic. More than 1,000 people competed for the seven jobs available. When the plant manager called the Highway Patrol for assistance with the traffic jam, he was told they couldn’t send anyone because three of their officers were in line to interview!
The organizational structure at Nucor is flat – to an extreme. There are only four layers of management between the Chairman of the Board and the newest hourly worker (Iverson, 1997). Each of the 53 facilities in the United States operates as a standalone, autonomous business with only one exception: corporate headquarters directly controls capital expenditures.
Headquarters receives weekly performance reports for each operating division which it then circulates to other divisions. This widespread sharing of information throughout the Nucor organization is in keeping with its egalitarian culture and is similar to Springfield Remanufacturing’s “Open Book Management” approach (Stack, 1993)