Nucor Corporation Case Analysis Essay
Nucor Corporation Case Analysis
1. What are the primary competitive forces impacting U.S. steel producers in general and the producers like Nucor that make new steel products via recycling scrap steel in particular? Please do a five-forces analysis Rivalry among Steel Producers
There is a fierce competitive force in this industry. Rivalry revolves heavily around price competition because most steel products are commodities. Producing steel of satisfactory quality is most producers are familiar with. In a commodity market like steel, it is hard to distinguish products of one steel producer from another. I this type of market condition, buyers make a choice among lowest/best price sellers.
Moreover, competitively, meeting customers’ delivery schedule requirements is also a relevant consideration for the buyers. This particularly holds true when rival sellers are charging fierce competitive prices. Nucor is figuring out how to use low-cost scrap steel recycling technology to make a wider and wider range of steel products. Nucor is using its newly developed technological capabilities to enter a fierce battle for market share in the new product categories.
Competition from Substitutes
A moderately strong competitive force: there are substitute products that compete with steel. For instance, aluminum, plastics and other materials can be used in place of steel in some products. The Threat of Entry
A moderately strong competitive force: it is less likely that new start-up firms will enter the steel industry. According to this case, existing steel producers are anxious to operate their plant at their full capacity. It is more likely to seek out customers in geographic markets where they do not currently have a presence. Moreover, it is clear that new entry may occur when companies like Nucor and Mittal Steel acquire less successful steel producers and try to turn the operations of the newly acquired companies into strong contenders in the marketplace. Nucor’s recent acquisitions, for example, represent entry of a potent and competitively successful steel company into either product categories or geographic areas where its presence is minimal. Similarly, Mittal Steel’s growth via acquisition strategy has turned it into a major competitive force worldwide. Bargaining Power of Suppliers
There is a moderate competitive force in case of scrap steel suppliers and unionized steel companies but there will be a weak competitive force otherwise. There is an indication that suppliers are major competitive factors. However, the price of scrap steel is a key input for mini-mills and rising scrap prices can put them at a competitive disadvantage. But scrap steel prices appear to be a function of overall market demand-supply conditions rather than a function of the power of individual suppliers of scrap steel.
Bargaining Power of Customers
A moderate to weak competitive force when demand is strong and in short supply but a potent competitive force when demand is weak and steel suppliers are anxious to win a customer’s business. The competitive conditions in steel can be tough when the supply is greater than demand and that price competition tends to dominate the competitive environment because of the commodity-like nature of steel products. 2. What driving forces do you see at work in this industry? Are they likely to impact the industry’s competitive structure favorably or unfavorably? Three factors qualify as driving forces here:
A. Technological innovation in steel-making via electric arc furnace technology, thin-slab casting, and direct casting of carbon steel that has allowed companies like Nucor to enter product segments formerly dominated by the integrated mills of producers using older, more traditional steel-making technology. This driving force is acting to increase the competitive pressures that mini-mills are putting on the integrated producers. There is an unfavorable result from the standpoint of integrated producers but a highly favorable result from the standpoint of the producers like Nucor that are leading the charge to use new low-cost steel-making technology.
B. Steel-making capacity worldwide exceeds the demand for steel, such that companies anxious to operate their plants at full capacity are seeking to find foreign customers for their output. Thus a number of foreign steel suppliers are shipping some of their output to the U.S. This puts them in a head-to-head competition with domestic steel suppliers. High-cost domestic steel suppliers are the hard hit by imported foreign steel. C. Industry consolidation to a smaller number of larger and more competitively successful steel companies (lead in part by the acquisitions of Mittal Steel and Nucor) is acting to increase competitive pressures. Aggressive companies like Nucor may be able to acquire efficient plants at bargain basement prices and enhance their long-term competitive market position. The industry outlook and competitive structure is much brighter for a low-cost producer like Nucor, which, is in a good financial position.
In other words, tough industry conditions do not hit all competitors equally hard. As one of the industry’s low-cost producers, Nucor is in good position to gain sales and market share at the expense of the high-cost producers and those exiting the marketplace. Thus an industry’s market environment may be unattractive to some rivals doesn’t necessarily mean it is unattractive to all rivals because tough conditions for some may mean attractive opportunities for others. 3. 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? All the U.S. steelmakers have different prospects for future profitability. High-cost steelmakers in the U.S. are in a risky position, earning profits because of short supplies and historically high market prices, but facing a weaker future when demand weakens and the market prices for steel products slip.
A low-cost producer like Nucor is easy to gain sales and market share at the expense of high-cost producers, although it must certainly fight off low-cost foreign suppliers opting to sell in the U.S. to achieve this result. Hence, we think Nucor should certainly consider expanding its capacity via both additional acquisitions and the construction of new plant capacity. And Nucor should probably be somewhat aggressive in doing so, since it has proven expertise in operating plants efficiently and profitably. However, many domestic steel producers need to understand expanding in the present environment unless they have the knowledge and ability to do so. There is a tendency for domestic steel producers to acquire and expand existing steel mills rather than to construct new ones. In doing this, they can avoid price-cutting and overcapacity during excess supply of steel products.
4. What type of strategy has Nucor followed? Which of the five generic strategies discussed in Chapter 5 is Nucor employing? 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? Low cost provider: continued plant upgrades, cost reduction, and greater control over raw material costs. Very clearly, Nucor is pursuing a low-cost leadership strategy. Such a competitive approach often is the best strategy in a commodity product industry. Nucor has been successful in achieving relatively low production costs.
Nucor builds plants inexpensively and operates them efficiently. Nucor’s record of profitability during hard times in the domestic steel industry is clear evidence that it is a low cost provider as compared to other domestic steel producers in the U.S. Nucor has to go far away from domestic competitors. No domestic competitors appear to have costs as low as Nucor. Nucor has a sustainable low-cost advantage over domestic steel producers and that it seems able to hold its own in competing against low-cost foreign steelmakers.
5. What are the specific policies and operating practices that Nucor has employed to implement and execute its chosen strategy? Some of the specific policies and operating practices that Nucor has employed to implement and execute its chosen strategy (in pursuit of low-cost leadership status) include: The aggressive implementation of cost-saving technological improvements Nucor’s incentive compensation system for both plant employees and senior managers Nucor’s HR practices and policies such as its no-layoff policy and its empowerment of plant employees The company’s low-cost culture and operating practices.
The company’s pursuit of innovative technologies to inter into new market segments The emphasis on decentralized decision-making and a very lean corporate staff. Employees were kept informed about company and division performance. Most all employees were quite aware of the level of profits in their plant or division. Nucor plants were linked electronically to each other’s production schedules, and each plant strived to operate in a just-in-time inventory mode. 6. What specific factors account for why Nucor has been so successful over the past several decades? Do these factors have more to do with great strategy, great strategy execution, or great leadership? There are several factors that account for Nucor’s spectacular success over the years: 1. Nucor’s a low-cost leadership strategy.
Nucor is an excellent example of a company with a winning strategy (a clear reason for the company’s success). 2. All of its operating practices, policies, and procedures are great competing strategies for Nucor, but it has also implanted and executed those strategies effectively and efficiently. 3. Nucor has had great strategic leadership, especially, in the case of Ken Iverson, Dan DiMicco, and senior executive team is a big reason for the company’s success over the long-term. Therefore, Nucor is a standout company in an industry that is highly competitive and profitable. Nucor can be an example of “great strategy + great strategy execution = great management “ 7. What is your assessment of Nucor’s financial performance the past several years? How strong is the company’s financial condition? Financial Analysis
Assessment of Nucor’s financial performance in the past several years and the company’s financial strength can be analyzed mainly using Nucor’s case Exhibits 1, 2, and 3. Based on the data on Exhibit 1, the following Compound Annual Growth Rates (CAGR) of Tons Sold for Outside Customers, Total Net Sales, Total Earnings Before Tax, and Total Net Earnings are analyzed: Compound Annual Growth Rate (CAGR) = [(Ending Value / Beginning Value)^(1/n)] – 1 The compound annual growth rate (CAGR) of total tons of steel sold to outside customers from 1970-2006 and 2007-2011 is 13.86% and 13.99% respectively. These figures show that there is an increasing trend in the total amount of steel sold to the outside customers.
CAGR in net sales from 1970-2006 is 17.06% and the net sales from 2007-2011 is 18.06% CAGR in earnings before taxes from 1970-2006 is 21.84% and that of from 2007-2011 is 19.05% CAGR in net earnings from 1970-2006 is 22.74% and that of from 2007-2011 is about 20% The calculated result clearly indicate that Nucor has been able to grow its business very consistently over the past several years from 1970 to 2011 even though there were fluctuations in the total tons of steel sold after 2008 as indicated in Exhibit 1 on page C-215.
The data in Case Exhibit 2 indicates that Nucor is in good financial shape and that its financial performance has been particularly strong from 2002-2008. Using the financial ratio information provided along with calculations of CAGRs, we can determine the following: Nucor’s net sales grew from $4.8 billion in 2002 to $23.7 billion in 2008, a very healthy CAGR of 25.62%. The strong increase is due both to rising unit sales volume and rising selling prices per ton (we can see in columns 2 and 3 of Exhibit 1 on page C-215 and also the data in case Exhibit 3 on page C-221). Nucor’s net earnings grew from $162.1 million in 2002 to $1.83 billion in 2008; and CAGR of 41.4%. However, the big gains primarily came from 2004-2008 period. Financial Ratios
Based on the above table the cost of goods sold as a percentage of net sales in 2007, 2008, and 2009 is 81.14%, 82.90%, and 98.62% respectively. The rise in percentage of Nucor’s cost of goods sold during 2007-2009 is more a reflection of a depressed sales price for steel products than of costs running out of control. This implies that the rate at which the sales decreased is greater than the rate at which the cost of good sold decreased because in Exhibit 2 both the net sales and cost of goods sold shows a decreasing trend. However, the net sales decreased by more than 50%, whereas the cost of goods sold decreased by a little less than 50%. Generally, there is from 2007 to 2011, we can conclude that there is a fluctuating trend in the cost of products sold as a percentage of net sales.
Likewise, the marketing, administrative, and other expenses as a percentage of net sales has a fluctuating trend due to a fluctuating trend in both net sales and marketing, administrative, and other expenses. Generally, all things considered, Nucor is in very good financial shape. If we look at the balance sheet statement from 2000 to 2006 as a representative of the whole data, Nucor’s working capital has increased from $821.5 million in 2000 to $3.23 billion in 2006, giving it substantially more fund to conduct business operations and more financial flexibility. The company’s current ratio has climbed steadily during the 2000-2006 period as well.
When we look at the cash flow statement, Nucor’s cash flows from operating activities climbed from $820.8 million in 2000 to $2.25 billion in 2006. This implies that Nucor’s cash flows have been sufficient to cover its annual capital expenditure. As far as Nucor’s long-term debt is concerned, even though Nucor’s long-term debt climbed from $460.5 million in 2000 to $922.3 million in 2006, Nucor’s long-term debt as a percentage of stockholders’ equity dropped from 21.6% to 19.1%; the company clearly has the ability to handle the higher level of debt due to acquisition. 8. What issues does Nucor management need to address?
To be more financially and competitively successful in the years ahead, Nucor has to address the following issues: In Nucor’s case, we see the following issues:
International expansion should be strengthened.
For example, Work more on value added products
Expansion into developing countries
Developing strategic aliens with other steel producing companies (Caterpillars) to better strength themselves.
Union formation is a key to employee rights
Continue to pursue a low-cost leadership strategy
Continue to seek out profitable opportunities to expand the company’s production capacity. Expanding into the markets of foreign countries needs to be pursued very carefully and cautiously because of its exclusive access to lower- cost steel-making technologies