Nucor Corporation: Competing against low cost Steel imports

I. Background/ problem identification

Nucor earlier started with the nuclear equipment and electronics business in the early 1950s and 60s. The company was facing heavy losses and was on the verge of declaring bankruptcy, when the Board of Directors was seeking for new leadership. Iverson was appointed from within the Board in 1964 with a completely new vision. He concluded that the best way was for Nucor to take a different path altogether with their successful Vulcraft subsidiary in the steel business. It was then the company earned its current name and divulged in to the industry. Later on, in 1968, management of Nucor decided for backward integration which is into steel making to apply benefits of supplying their own steel to their requirements. Iversons long term strategy was to become the major player in the U.S steel industry. By 1985, Nucor was the seventh largest in America with high held revenue figures and net profit margins. Nucor was regarded as the low-cost and technologically innovative steel producer to the world. During the recession in 2000/01 25% of U.S companies declared bankrupt and some of them suffered heavily whilst Nucor withstood the depression healthily since their efficient and low-cost strategy was successful. Iverson was a leader who walked the talk. He proved himself as a Master in crafting and executing a low-cost leadership strategy, and he made a point of making sure he practiced what he preached. Nucor was not a company that had jet planes for their directors, nor company membership schemes with outside clubs, or executive dining facilities. Iverson thought of this to be a factor of rising costs. In fact he being the President and CEO of Nucor, took the subway in the city. Iverson had to leave the company following disagreements with the Board in 1998 and was succeeded by DiMicco. Disagreements may have been due to the lack of extravagance that was not offered by the president. Other firms from China, Russia, Brazil and India are dumping steel in to the U.S which affects the demands for Nucor. Those companies are being subsidized by their governments for support. After many acquisitions and joint ventures globally, Nucor is in the environment that is highly volatile and economy at a slow down. The 2008 recession affected Nucors profits. Although Nucor has a competitive advantage of being large they still have to face impact from the outside
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environment. One of the strategies of Nucor is acquiring new companies that have an advantage, such as Birmingham steel would broaden customer base. However it is not clearly mentioned whether Nucor takes into account the financial and non-financial factors of acquisition. Sometimes there is a question whether is it necessary that they need to acquire to broaden customer base or locate closer to the customer to service their needs? Cannot they do it with Vulcraft or Nucor itself? In addition, Nucor is heavily dependent on scrap steel for production. Currently scrap steel prices are on the increase and energy too. II. Analysis and evaluation

Porters five forces model Industry rivalry among competitors The steel industry is mature with intense competition. Other larger companies, Nucor competes with, is Mittal Steel and U.S steel. Apart from the local players global players are in the market to with imports from Russia, Brazil and China. High rivalry in the industry makes the attractiveness low. However Nucors acquisition Crawfordsville had a newer technological innovation called the Castrip technology which differentiated their product. This differentiation is ideal to stand high against rivalry. Bargaining power of Buyers Buyers pose arguably the greatest threat. Price competition develops from buyers having low switching costs and low product differentiation. Steel industry is the buyers market and that is why Nucor produces to customer specification the cold finished steel products with requested shapes. Numbers of suppliers are high which means their influence is low. Nucors buyers are mainly automobile, farming, electric appliance industries etc.

Bargaining power of suppliers If the numbers of suppliers are reduced the suppliers bargaining power is increased. Nucor acquired many steel firms in the industry and holds a large portion of the industry. Nucor has increased their bargaining power as a single firm. Yet they stand second largest to U.S steel. Global joint ventures Nucor holds with firms still gives them additional influence. Nucor
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acquired other steel producing firms that produce different steel products like girders roofs etc so the switching costs for Nucor is comparatively less.

Threat of new entrants Industry attractiveness is low with many players and the market being saturated. Entry into any industry depends directly on the associated costs. With globalization being the current trend and the merging of many competitors, the barriers to entry have increased. Economies of scale and capital requirements are the greatest barriers in the steel industry. Larger quantity orders of raw material are usually discounted. The initial investment is low and economies of scale can be derived which makes the barriers to entry lesser. Nucor has economies of scale and differentiated technology (regarding the Castrip) which can be a barrier to existing companies and new ones entering the industry.

Threat of product substitutes In this case there should be an alternative to steel that would be a threatening substitute. From auto manufacturing, to structural supports, to fasteners, there are relatively few products available with the strength, durability, and cost efficiencies of steel. Plastics are a newer product that substitutes to some extent because it lacks characteristics that steel exhibits. Alternatives like plastic and other products increase market presence during the times of economic down turns or when there is a price increase in steel.

SWOT analysis Strengths Nucor acquires many companies and increase their capacity and size. They are a large group integrated backwards and they can enjoy multiple economies of scale. The industry is in a mature product life cycle stage but Nucor had remarkable profits by earning a profit in every quarter. Nucors technological advantage by having efficient new state of the art equipment and facilities keeps them higher than their rivals. Their low cost strategy where the labor cost is only 8% of revenue helps them to maintain their long term growth. Also their employment pay schemes are widely accepted by their workforce which automatically improves their efficiency and no pressure is required by top management. Nucor also carries out a environmental program by
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planting trees that absorb the carbon emission from their factories. This can help show their CSR values and reduce pressure group resistance.

Weaknesses Nucor seems to be more self consciences by growing larger but do not consider other factors like industry rivalry and product diversity like shifting from steel to other components.

Opportunities Nucor can become multinational instead of joint ventures and earn royalty instead of pay them. They can venture themselves into new markets and increase market growth.

Threats Dumping of steel to the U.S economy is a threat that Nucor is facing. And being highly dependent on scrap steel for raw material and energy for production, Nucors strategy of lowcost can be at stake.

Solutions to the problems Nucor can indulge into new global markets and increase markets. They can go into the markets like Russia, Brazil, China because they dump into the U.S market. However Nucor should analyze the five forces before entering those markets. They could be highly competitive. Nucor can find other alternative ways of collecting scrap steel for cheap. They can find new suppliers who offer cheaper raw material. Nucor can also open a dump yard where domestic household customers can dump the waste scrap steel. Nucor may even be able to collect free scrap from this. However there may be pressure groups and environmental problems from these yards. Nucor should consider developing the Vulcraft and Nucor brand further without more acquisitions. May be the acquisitions would have covered the idea for self development.

Recommendations Nucor should go global on their own. They could find countries with scope like India and China who are referred to as the BRIC countries. These countries have emerging market potentials with increasing infrastructure. More steel would be required for development. Countries building new ports, power plants and other infrastructure developments would require steel with competitive prices. Nucor has the competitive advantage of low cost pricing. Nucor should continue on improving their low cost strategy because that is their differentiation. They need to consider their size as companies that are too large do collapse. Nucor should also find newer technological means although they are differentiated with efficient ones, to improve on their energy efficiency. Energy costs on the rise are a threat to their low cost strategy. Nucor should also find cheaper alternatives to get scrap steel to fight with their strategy. If Nucor is able to apply these techniques they can remain a successful organization in the years to come with a very dynamic and volatile market.

References
y y y y Crafting and executing strategy, Arthur Thompson, Junior, 16th edition http://www.nucor.com/ Case nine, page c-129, Nucor Corporation: competing against low-cost steel imports, Arthur A. Thompson., Crafting and executing strategy 16th edition http://www.steelguru.com/stainless_steel_news/BRIC_countries_powered_the_van adium_production/163768.html (Sourced from Roskill Information Services)